Mike Kuta – Sweet Futures (09-25-14)

Published on 09-25-2014

Consumer Comfort in U.S. Falls to Lowest Since Early June.

Consumer confidence fell last week to an almost four-month low as Americans’ views of the economy and their finances deteriorated. The Bloomberg Consumer Comfort Index declined to 35.5 in the period ended Sept. 21, the worst reading since the first week of June, from 37.2. The personal finances gauge dropped by the most since mid-May, while attitudes about the world’s largest economy were the dimmest in four months. The comfort index is hovering close to this year’s average, indicating job growth that sparks bigger wage gains are needed to set the stage for more spending. While stock-market gains helped boost sentiment among Americans with incomes of more than $50,000 a year, confidence of those earning less fell to a four-month low. “Consumers are still looking for some tangible sign of economic improvement and have yet to see it,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg. “This week shows the struggle.” The Bloomberg gauge of Americans’ views on the current state of the economy declined to 22.9 last week, the weakest since May 25, from 24. The measures of personal finances dropped to 51.3, the lowest since Aug. 10, from 54.3. A gauge of the buying climate, which shows whether this is a good time to purchase goods and services, dropped to 32.2 from 33.4.

Jobless Claims:

Among other reports today, fewer Americans than forecast filed for unemployment benefits last week. Initial jobless claims rose by 12,000 to 293,000 in the period ended Sept. 20, the Labor Department said. The median estimate of economists in a Bloomberg survey called for 296,000 claims. Orders for business equipment climbed more than forecast in August, other data showed. A 0.6 percent advance in bookings for non-military capital goods excluding aircraft followed a 0.2 percent decrease in July that was smaller than previously estimated, according to the Commerce Department. Demand for all durable goods — items meant to last at least three years — slumped a record 18.2 percent as commercial aircraft orders dropped after surging a month earlier. Sentiment among those earning less than $50,000 a year dropped to the lowest level since the period ended June 1, underscoring how bigger wage gains remain a missing element as the labor market improves. Employers have added 215,380 jobs a month on average this year. That compares with 2013’s average of 194,250 and 186,330 the previous year.

Unemployed Sentiment:

Today’s report showed employment opportunities may be waning. Sentiment among the unemployed dropped last week by the most since February 2011. Average hourly earnings rose 2.1 percent in August from a year ago, in line with the average since the recession ended in mid-2009, according to Labor Department figures. Such wage growth has limited spending. Household purchases decreased 0.1 percent in July, the first decline in six months, after a 0.4 percent gain in June, Commerce Department figures showed last month. Incomes rose at the slowest pace of the year and savings climbed to the highest level since the end of 2012. Dunkin’ Brands Group (DNKN), which operates Dunkin’ Donuts and Baskin Robbins ice cream stores, lowered its forecast for earnings as lower-wage Americans cut back.

First Half:

“The first half has been challenging,” John Costello, president of the coffee and ice cream franchise’s marketing and innovation, said at a Sept. 17 investor and analyst meeting. “The lower-income households continue to struggle. Consumer confidence kind of motors along. It’s made the value segment very competitive.” Sentiment among households making above $50,000 a year rose by 2.4 points to 49.7, expanding the gap between the two income groups to its widest since early June. Among regions, the Northeast showed the biggest drop in sentiment last week, with the index falling by 3.1 points to 31.6. Confidence in the Midwest and South fell to a five-week low. The Bloomberg Comfort Index has been presented on a scale of zero to 100 since May, rather than the previous minus 100 to 100, with the midpoint shifting to 50 from zero. The change is also reflected in the gauge’s components. It doesn’t affect the measures’ relationship to each other or their correlation with other economic indicators. Historical data has been revised and analysis of trends, values and other variables also aren’t affected.

Europe Seen Coping With Russian Gas Cut in Normal Winter.

The European Union would probably sustain a disruption of Russian natural gas flows via Ukraine should winter temperatures remain within seasonal norms. There will be enough gas to cover a shortfall under “normal winter conditions,” Citigroup Inc. said in a report e-mailed yesterday. Most EU countries will be able to meet their usual gas demand if cuts in Russian flows last three months in the winter, according to the Institute of Energy Economics at the University of Cologne. With less than a week to go until the heating season starts, European nations have pumped record volumes into storage facilities. Countries including Slovakia and the Balkan nations suffered disruptions in Russian gas supply via Ukraine in freezing temperatures in 2006 and 2009. Russia meets about 30 percent of the region’s gas needs and ships half of that via Ukraine, whose imports from its eastern neighbor halted June 16 in a price and debt dispute. “The usual gas demand will still be able to be met even with a three-month embargo,” Felix Hoeffler, an economics professor at the University of Cologne, said today at a conference in Brussels. “The longer the supply disruptions take, the more countries will be affected.” While Finland and Bulgaria are “extremely vulnerable,” most countries wouldn’t be “severely affected” if the cuts are short, Hoeffler said. Germany, Russia’s biggest gas buyer in Europe, wouldn’t be able to meet all usual gas demand if a disruption lasts six months, he said. European storage facilities contained a record 75.7 billion cubic meters (2.7 trillion cubic feet) of gas yesterday, making them more than 91 percent full, according to Gas Infrastructure Europe, a Brussels-based lobby group. “If colder weather arrives, then storage levels could well be drained,” Citigroup said.

Gas Talks:

Ukraine owes Gazprom $5.3 billion, according to the Moscow-based company. Ukraine has refused to pay higher prices charged since April 1. Russia, Ukraine and the EU are holding talks in Berlin tomorrow to discuss a resolution to the dispute. A disruption is most likely to come out of the dispute and the difficulty Ukraine’s state-run NAK Naftogaz Ukrainy will have to pay OAO Gazprom in advance for supplies this winter, Energy Aspects Ltd. said Sept. 8. A halt in supplies is more probable in the first quarter than in the fourth quarter and will likely be short term, lasting no longer than half a month, according to the industry consultants in London.

Double Prices:

There is a more than 70 percent chance that Russia will stop gas flows to Europe via Ukraine this winter to discredit Ukraine as a transit route, Naftogaz Ukrainy Chief Executive Officer Andriy Kobolyev said on Sept. 23. Gazprom is a reliable supplier and security of natural gas transit to Europe depends on Ukraine, the company’s press service said today by e-mail. The disagreement will probably “drag on a little bit further into the winter,” Mark Simons, director of EU gas marketing at BG Group Plc, said Sept. 19. European natural gas prices will at least double in a sustained disruption of Russian gas flows amid the Ukraine conflict, according to Energy Aspects. The research company expects the fourth quarter U.K. gas price to be 55 pence a therm ($8.98 a million British thermal units), with the first-quarter price at 60 pence, assuming the winter will be colder than last year and warmer than average, it said Sept. 12.

Warmer Weather:

Most of Europe will be warmer than usual from October through December, Weather Services International meteorologist Todd Crawford said Sept. 22 A complete disruption of Russian supplies transiting Ukraine from October through March in an average winter would completely draw down storage and entail additional imports of liquefied natural gas of 19 billion cubic meters, Energy Aspects said in a Sept. 8 note. An extreme winter would see LNG imports increase by as much as 39 billion cubic meters, while a cut in the fourth quarter alone would result in an additional call on LNG of 2 billion to 22 billion cubic meters. The EU will seek a temporary agreement on gas prices between Russia and Ukraine at tomorrow’s talks to avoid disruption of supply, Energy Commissioner Guenther Oettinger said today in Brussels.

Orders for U.S. Capital Goods Climb More Than Forecast.

Orders for U.S. business equipment climbed more than forecast in August, indicating corporate investment will help spur economic growth. A 0.6 percent advance in bookings for non-military capital goods excluding aircraft followed a 0.2 percent decrease in July that was smaller than previously estimated, data from the Commerce Department showed today in Washington. Demand for all durable goods — items meant to last at least three years — slumped a record 18.2 percent as commercial aircraft orders dropped after surging a month earlier. The increase in capital goods orders, combined with gains in employment, shows improving sales are giving companies the confidence to expand. Paced by growing demand for automobiles and housing, assembly lines will probably stay busy and help fuel the economy in the second half of the year. “It’s very encouraging that businesses are starting to ramp up spending,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. “Demand has been good, and improving. We’re getting to the point where companies are going to invest both for replacement and for growth. That will contribute to overall growth in the economy.” The median forecast in a Bloomberg survey called for a 0.4 percent gain in non-defense capital goods excluding aircraft after a previously reported 0.7 percent decline in July. Another report today showed fewer Americans than forecast filed for unemployment benefits last week. Initial jobless claims rose by 12,000 to 293,000 in the period ended Sept. 20, the Labor Department said in Washington. The median estimate called for 296,000 claims.

Broad Gains:

Factories last month received more orders for fabricated metals, machinery, communications equipment, appliances and electrical components, today’s durables report showed. The median projection of 80 economists was for an 18 percent drop in orders for all durable goods. Estimates ranged from declines of 10 percent to 22 percent after a previously reported 22.6 percent jump in July. Last month’s decrease was the largest in comparable data back to 1992. Overall durable goods were depressed by a 74.3 percent decrease in bookings for civilian aircraft, according to the Commerce Department’s report. In July, those orders surged almost 316 percent. Boeing Co., the Chicago-based aerospace company, said it received 107 orders in August, following 324 in July.

Motor Vehicles:

While demand for automobiles declined 6.4 percent in August, the most this year, it followed a 10 percent surge a month earlier. Bookings are up 4.6 percent so far in 2014 compared with the same period last year. Vehicle purchases remain a source of strength for manufacturing and the economy. Sales of cars and light trucks rose to a 17.5 million annualized rate in August, the highest since January 2006, from a 16.4 million pace a month earlier, according to data from Ward’s Automotive Group. Chrysler Group LLC reported its best August in 12 years for U.S. vehicle deliveries, while Ford Motor Co. (F), Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. also posted results that surpassed analysts’ projections. “The recent economic indicators remain very favorable and consistent with our expectations for growth,” Emily Kolinski Morris, senior U.S. economist at Dearborn, Michigan-based Ford, said on a Sept. 3 conference call with analysts. Improving employment and robust manufacturing activity are among developments that “should provide positive momentum for the economy as we continue in the second half,” she said.

Minus Transportation:

Excluding transportation equipment, durables orders were up 0.7 percent after a 0.5 percent decrease a month earlier. They were projected to rise 0.6 percent, according to the Bloomberg survey median. Shipments of non-defense capital goods, used in calculating gross domestic product, advanced 0.1 percent after rising 1.9 percent, more than previously estimated. Other data show factory activity has gained traction. The Institute for Supply Management’s factory index climbed in August to the highest level since March 2011, the Tempe, Arizona-based group reported on Sept. 2.

‘Modest’ Growth:

“We think that both world growth and U.S. growth is, I would characterize, modest,” Richard Fearon, chief financial officer at Eaton Corp., which makes electrical equipment for buildings and hydraulics for machinery, said at a Sept. 15 conference. In the U.S., there’s been “a very, very subdued recovery, and we think that the growth has picked up some and we agree that second-half growth is probably in the 2.5 percent to 3 percent range.” At the same time, weaker overseas markets are taking a toll on some U.S. manufacturers. Terex Corp., a Westport, Connecticut-based maker of construction equipment, cut its full-year forecast citing weakness in the crane market, in part due to weak overseas demand. Its order rate for cranes “has dropped significantly in July and August,” Terex said in a statement this month.

Jobless Claims in U.S. Climbed Less Than Forecast Last Week.

Applications for unemployment benefits in the U.S. increased less than forecast last week as an improving economy prompted employers to retain staff. First-time jobless claims climbed 12,000 to 293,000 in the week ended Sept. 20, the Labor Department reported today in Washington. The median forecast of 46 economists surveyed by Bloomberg called for 296,000. Claims reached a 14-year low of 279,000 in mid-July. Firings are hovering near decade lows and companies are hiring in anticipation of a sustained pickup in household spending. Still missing from the equation are bigger wage gains, which would shift the economic expansion into higher gear. “This is all good news,” said Ray Stone, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey, who forecast a rise in claims to 293,000. “The labor market is doing pretty good.” Estimates in the Bloomberg survey ranged from 275,000 to 320,000. Another report today showed orders for business equipment climbed more than forecast in August, indicating gains in business investment will help boost economic growth this quarter. Bookings for non-military capital goods excluding aircraft rose 0.6 percent last month after a 0.2 percent decrease in July that was smaller than previously estimated, according to figures from the Commerce Department.

Record Drop:

Demand for all durable goods, those meant to last at least three years, slumped a record 18.2 percent, reflecting a payback in commercial aircraft after plane bookings jumped in July, the report also showed. Stock-index futures held earlier losses after the reports. The contract on the Standard & Poor’s 500 Index maturing in December fell 0.2 percent to 1,986.3 in New York. No states estimated data last week and there was nothing unusual in the report, a Labor Department spokesman said as the jobless claims data were released. The four-week average of applications, a less-volatile measure than the weekly figure, fell to 298,500 from 299,750 in the prior period. The number of people continuing to receive benefits rose by 7,000 to 2.44 million in the week ended Sept. 13. The unemployment rate among people eligible for benefits held at 1.8 percent during that period, today’s report showed.

August Slowdown:

After a six-month hiring burst that put more than 1.4 million Americans to work in the first half of the year, payroll growth slowed to 142,000 in August, the smallest monthly gain this year. Average hourly earnings rose 0.2 percent last month, and grew 2.1 percent since August 2013, barely exceeding inflation. Some companies continue to shed workers amid weak demand. Microsoft Corp. fired 2,100 employees earlier this month, part of a plan announced in July to eliminate 18,000 jobs. At the same time, the economy is continuing to add jobs. Smaller employers seem to be accelerating hiring, said Efrain Rivera, chief executive officer of Paychex Inc. (PAYX), a benefits outsourcing company based in Rochester, New York. “We’ve noticed a trend ticking up on our sales to newly formed businesses,” Rivera said on a Sept. 24 earnings call. “If you go back a couple of years ago, we were not seeing that trend. That now seems to be evident.”

Brazil’s jobless rate at 5.0 pct in August.

Brazil’s non-seasonally adjusted jobless rate stood at 5.0 percent in August, statistics agency IBGE said today in the first release of official unemployment numbers after a strike disrupted the job market survey for months. The number was slightly above the median forecast of 4.9 percent in a poll of 11 economists. In August 2013, Brazil’s jobless rate stood at 5.3 percent.

U.S.-German yield gap near widest in 15 years as Fed, ECB part ways.

The yield premium U.S. Treasuries offer over German Bunds stood near 15-year highs on Thursday as markets weighed prospects of U.S. interest rate hikes against the chance of more monetary stimulus in the euro zone. Data showing strength in the U.S. housing market and the weakest demand since December for a five-year T-note auction on Wednesday underscored expectations the Federal Reserve is gearing up for rate hikes, although comments by U.S. officials underlined that debate was still raging within the central bank. Chicago Fed President Charles Evans said the Fed should be “exceptionally patient” in removing its monetary stimulus, while Cleveland Fed’s Loretta Mester said the Fed should drop language saying it would hold rates near zero for a “considerable time.”

In Europe, lending to euro zone households and companies contracted for the 28th month in a row in August and the Ifo German business climate index fell for the fifth straight month in September. European Central Bank President Mario Draghi said he was ready to stimulate the economy further if needed. Many market participants believe the ECB will eventually start printing money via government bond purchases – known as quantitative easing (QE). It has already cut its benchmark interest rate to close to zero and said it will buy asset-backed securities and covered bonds. Ten-year German Bund yields were 1 basis point lower at just below 1 percent, while U.S. Treasury yields were also 1 bps down at 2.56 percent, retreating in European trade after a 4 basis point rise during U.S. hours. The spread between the two, at 156 bps, was within touching distance of recent 15-year highs of 158 bps. http://link.reuters.com/sah92w “The expectation of more stimulus by the ECB should continue to underpin euro zone bonds as the winding down of QE in the U.S. is ongoing and expected to be completed in October,” said Michiel de Bruin, head of global rates at F&C Investments. “This is likely to be the trigger for a rise in yields in the run-up to a hike in interest rates, possibly in the first quarter of 2015. By contrast, the timeline for rate rises is much more extended in the euro zone.”


The yield gap is a key driver of the euro/dollar exchange rate. The euro fell to its lowest in 22 months against the dollar, while the dollar index against a basket of currencies hit new four-year highs. The financial world is watching with concern the timing of the first U.S. rate hike after years of unprecedented monetary stimulus as a multi-year cross-asset rally could reverse in some regions once U.S. money becomes more expensive.  But that point has yet to be reached. “Like one investor said, it feels like waiting for the earthquake sitting on top of a seismic rift zone,” Societe Generale strategists said in a note. “Unless you want to shut down house altogether, you are better off having a good time and partying.”

The risk of trading futures and options can be substantial. Trading foreign exchange carries a high degree of risk, and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by Sweet Futures 1, LLC shall be construed as a solicitation. Sweet Futures 1 does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This website contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by Sweet Futures 1. Past performance is not necessarily indicative of future results.

Back to Sweet Futures Market Blog