Bond Yields Shot Higher Across the Globe as Prices Dropped…
From the German bund to the U.S. Treasury, yields jumped on long maturity bonds as investors questioned the effectiveness of central bank policy.
What it means – What took so long? Just about everyone on the planet not named Paul Krugman or a Central Banker – have been pointing out failed central bank policies for years.
I guess it took Bank of Japan (BoJ) governors questioning their own initiatives to strike fear in the hearts of investors that we might be at the end of the easy-money road. With both the BoJ and Federal Reserve announcing their policies next week, expect more Noise in the bond market.
Retail Sales Drop 0.3% in August…
Following a modest 0.1% gain in July, retail sales disappointed in August. More important than the headline number, core retail sales – less autos and gasoline – fell for the second straight month.
What it means – But, we were recovering! CNN said things were great! Or not. The latest retail sales figures just confirm the stagnant nature of the economy. GDP growth was awful in the first two quarters, so the consensus estimate called for a smart rebound in the third quarter. This appears overly optimistic.
We’ll be lucky for GDP to grow 3% this quarter, and even that growth rate won’t make up for the average 0.95% growth in the first half of the year. These calculations will make the Fed’s path to higher rates more difficult.
Inflation Up 0.2% in August, 1.1% Over Last Year…
Core inflation, which removes food and energy, rose 0.3% last month, and rose 2.3% from a year ago.
What it means – At first glance, it looks like the Fed is finally getting the inflation signals it wants before it raises rates. But a closer look reveals the difference between “good” and “bad” inflation. Good inflation reflects the rising cost of goods and services due to higher demand, which eventually translates into higher wages and a rising standard of living. In short, people are buying more of what they want.
Bad inflation shows up in goods and services people must purchase, taking money away from discretionary spending. Higher medical costs drove up this month’s inflation data. Medical care commodities jumped 1.1% in August and surged 4.5% over last year, while medical care services costs increased 0.9% last month and increased 5.1% over last year. And this is before the anticipated Affordable Care Act rate hikes of 2017.
The Fed might use this data as cover for raising rates, but higher prices for healthcare don’t signal a healthy economy.
U.S. Import Prices Down 0.2% in August, Off 2.2% from August 2015…
Annual import prices have fallen for 25 consecutive months.
What it means – Lower import prices are the flip side of dollar strength, so this makes sense. But the dollar weakened most of this year. That’s OK, because the Chinese have a cure for that. They set the exchange rate between their currency and the U.S. dollar, and have consistently cheapened the yuan since their surprise devaluation last August. The result is continued exports for the Chinese, cheaper prices for the U.S., and a lot of pain for U.S. manufacturers trying to compete.
The odd part is that the Chinese currency should not be just a bit lower, it should be a lot lower. As the country’s economy slows and capital heads for the exits, its currency should drop, resetting the price of exports to rebalance the system. But that makes imports more expensive, and creates a drag on the standard of living. So the government is trying to manage the currency lower over time, slowly sending its deflation to the U.S. in the form of lower prices.
U.S. Real Median Household Income Up 5.2% in 2015…
The Census Bureau announced that median income had almost recovered all the ground lost after the financial crisis. However, we still remain about 2% below the levels of 1999, the all-time high.
What it means – The Census Bureau still can’t add – Here is the math. So the 5.2% increase in median household income came from the man of the house earning 1.5% more and the woman of the house earning 2.7% more? That’s some math!
If a couple earned an average of 1.9% more, where did the other 3.3% increase come from?
Let’s look at the list the Census Bureau uses as a sources of household income.
- Unemployment compensation
- Workers’ compensation
- Social security
- Supplemental security income
- Public assistance
- Veterans’ payments
- Survivor benefits
- Disability benefits
- Pension or retirement income
- Rents, royalties, and estates and trusts
- Educational assistance
- Child support
- Financial assistance from outside of the household
- Other income
Like you, I am thinking this list has nothing to do with real earnings. Yet, the 17 other categories the U.S. Census Bureau is using did not see an increase in payouts or increase in cost of living adjustments to reflect the difference between earnings and median income. Chalk it up to another government mystery. It must be common core math.
Churchill said it best, “a riddle, wrapped in a mystery, inside an enigma.” By the way, Churchill was describing politics in the Soviet Union.
European Union Industrial Production Fell 1.1% in July, Down 0.5% from July 2015…
The weakness was widespread in durable goods, with capital goods off 1.7%.
What it means – July’s drop was the biggest decline since March, and industrial production has contracted in four of the last six months. Germany, France and Spain all registered declines. The bad news showed up immediately after the Brexit vote at the end of June, and could signal falling confidence among businesses across the economic bloc.
When combined with weak exports, it will be difficult for the countries of the EU to grow their economies in the second half of this year. It looks like Draghi’s “lower for longer” approach for QE will stretch well beyond the extended deadline of spring 2017.
Chinese Industrial Production Up 0.53% in August, 6.3% Over Last Year…
It was the strongest monthly growth rate since March, and the annual rate was higher than forecast.
What it means – In this instance, the good news is bad news. Strong industrial production reflects rising activity, which is normally good. But here, the gains were in steel, concrete, coal, and electricity, all factors of production for infrastructure, while auto production slipped. It appears that the Chinese are still encouraging local governments to erect buildings and other projects to keep the boom going, even though the country already has too much of this stuff.
Increased current bond offerings by local municipalities support this theory, as provinces borrow to fund these projects. They’re borrowing what they can’t repay to build what they don’t need. This won’t end well.
Italian Women Angry at Fertility Day Ads…
The Italian government set September 22 as National Fertility Day, hoping to encourage Italians to have more children. Some women took offense that the government would encourage child bearing without promoting social support for programs such as maternity leave and child care at the same time.
What it means – This same story reverberates around the developed world. The desire among young families to have children has not changed much over the past four decades, but their ability to afford children has. Just look around the world – Free Stuff is not free. It’s the Free Stuff actually costing society something. Your Legacy and your countries future.
Chevy’s Bolt Touted as Tesla Killer…
General Motors announced that its new electric vehicle (EV), the Bolt, will go 238 miles on a charge, outpacing Tesla’s new Model 3, which is expected to go 215 miles.
What it means – GM wants in on the EV action. This field is a darling of the green energy movement, and the Tesla brand carries a mystique that GM covets. On top of that, government regulations require more EV sales by large auto companies, so rolling out a vehicle that whips up on Tesla is a multi-faceted win. Except, this is not a win.
Anyone who looks at a Chevy and then looks at a Tesla will not confuse the two. Claiming that a GM vehicle can go 23 miles farther on a charge doesn’t change the fact that it’s a Chevy… and not a Tesla. There’s a simple element of design missing from the Bolt that’s embodied in every Tesla that rolls off the line.
The Bolt could still succeed as a vehicle, but most likely as a fleet car for cities, school districts, and other entities that try to toe the government line on renewable energy. It’s highly unlikely this car will become a status symbol in the carpool lane anytime soon.