Economic and market themes: 2014-11-21 US, oil, Japan, and China

Today, I want to highlight some of the best stories in the news today.

US economy

Let’s start off with the US, where the hiring of holiday workers is said to track very well with retail sales. In the lead up to the holidays, the hiring by retail outlets suggests we are going to have a bumper year in terms of Holiday season retail sales. We have lower gasoline prices buoying consumer sentiment, which according to the Bloomberg Consumer Comfort Index, is at the highest levels since January 2008. We also have falling unemployment and a low level of jobless claims, which came in at 291,000 last week, putting the 4-week average at 287,500. And we have existing home sales, now at a seasonally-adjusted one-year high. Consumer credit is also now at a record high of $3.2 trillion due to increased credit card and auto loan debt.All of these data points suggest that we will see 3%ish growth for Q4.

Nevertheless, the capex numbers in the oil patch are going to diminish from this rosy picture. After I posted yesterday, I saw a good article at Bloomberg on breakevens that confirmed my $75 per barrel number as a sort of tipping point. Below this figure, shale formations start to look unprofitable. And the result is a reduction in capex, not just for shale but throughout the oil and natural gas sectors. This caution will last several quarters. For example, Apache Oil says it expects to spend $4 billion in capex on North America in 2015, a 26 percent drop from the $5.4 billion it has budgeted for the United States and Canada this year. We should also remember that funding costs are now rising, making breakevens even higher. I expect these numbers to impact GDP adversely, pulling it into the 2% range, which, all things considered, is not bad.


I’m not sure if this is related to the volatility in the energy high uield sector but BNP Paribas said it is getting out of junk bonds and cut its entire North American team (just in time for the holidays and without a bonus as is de rigeur in banking). This is a business they had expanded.

Also related here is the potential for more oil to come online in Iran. The Telegraph has a story out, saying that Iran would be willing to pump 4 million barrels of oil if it could reach agreement on nuclear. While this story seems speculative to me, it highlights the potential for more supply. The Wall Street Journal is also reporting that China’s strategic petroleum reserve may be at its limit. Counterbalancing that are rumours that the Russians are prepared to cut supply. At this point, the market looks well supplied and I think this puts downward pressure on price.


Here’s an interesting story out of Japan from the FT. Apparently, Japan has a problem with ‘zombie housing’ as many properties are vacant due to varying reasons. The FT points out that Japan’s population has been shrinking since 2008. So this adds to a lack of demand for new housing I suppose. The FT speculates that the shrinking population has exacerbated the downturn in property prices, especially because traditional Japanese housing stock is so poor. I highly recommend the article because it might have some applicability to other areas with demographic challenges. I am still thinking about the implications.

On a related note, Zillow says that the vast majority of housing in the US is relatively new, constructed in 1950 or later. “Nationwide, homes built between 2000 and 2009 represent the largest share of existing homes constructed, with 16 percent of all homes built during those 10 years.” To me, this speaks to a continued depression in new home sales relative to existing home sales.


An interesting tidbit from the South China Morning Post shows Chinese production of steel far outstripping domestic demand for steel. The Chinese now have record steel exports and this risks a trade war. For me, the article highlights the deflationary trends still ongoing in the industrial commodities space and the degree to which China is exporting that deflation abroad. China unexpectedly cut interest rates this morning due to the economic slowing. This was the first cut in over two years. It tells you that the slowdown in China has become too pronounced. And now the government is trying to mitigate downside scenarios.

Global growth

I was talking about a global growth slowdown yesterday. Citigroup is putting some numbers around this. Willem Buiter, Citi Chief Economist wrote: “Our global growth forecasts continue to drift down, and we are cutting 0.1 percent off our 2015 forecast this month, and now look for global GDP growth of 2.8% this year and 3.3% for 2015 (at current exchange rates)” And note the following here: “This is the second consecutive monthly downgrade to our 2015 growth forecast, while in total we have cut our 2014 forecast by 0.5 percent (from 3.3% to 2.8%) since January.” Again, the data are not supportive of higher oil or commodity prices. Just the opposite.

My roundup says the US is doing well, with the chance to move toward a rolling 3% y-o-y growth level going forward. But despite the relative size of the US economy insulating it from weakness abroad, the global growth slowdown has hit the oil patch in such an abrupt way, we should expect significant haircuts to growth. Nevertheless, the worst case scenarios of turmoil in high yield have yet to play out. If oil stabilizes at these levels, the US will continue to grow relatively robustly, though reduced oil sector capex will be a drag on growth.

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