Thursday’s Interesting Charts

It’s been literally six months since we’ve had a selloff like today’s, and it was delightful. Of course, Colonel Kilgore’s warning that “…someday, this war’s gonna end……” is echoing in my mind, since Yellen and her ilk always come along and screw things up just when it’s getting fun. In any case, here are a [...]

Fed Watch: On That ECI Number

Tim Duy (see Dean Baker too):

On That ECI Number: The employment cost index is bearing the blame for today's market sell-off. Sam Ro at Business Insider reports:
...traders agree that today's sell-off is probably due to one stat: the 0.7% jump in the employment cost index (ECI) in the second quarter.

This number, which crossed at 8:30 a.m. ET, was a bit higher than the 0.5% expected by economists. And it represents a year-over-year growth rate of over 2%.

It's a big deal, because it's both a sign of inflation and labor market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than later.

The ECI gain was driven by the private sector (compensation for the public sector was up just 0.5%, same as the first quarter), and I would be cautious about reading too much into those numbers. The Fed will take the Q2 reading in context of the low Q1 reading:


The first two quarters averaged a just 0.46% increase, pretty much the same as recent trends of the past five years. And look at the year-over-year-trend:


Nothing to see here, folks. Move along. Benefit costs for private sector workers also accelerated, but I think the Fed will likely interpret this as an anomaly:


Again, not out-of-line with readings both before and after the recession.
Bottom Line:  I understand why market participants might be a little hypersensitive to anything related to wages. Indeed, wage growth is the missing link in the tight labor market story.  But I don't think the Fed will react much to these numbers; they will place them in context of recent behavior, and in that context they are not much different than current trends.  Watch the upcoming employment reports for signs of diminishing underutilization of labor - that is where the Fed will be looking.

Driverless Cars on UK Public Streets Starting January; Transforming Personal Mobility; Taxi and Truck-Drivers Targeted

The march for fully autonomous driverless cars marches on. In May, Google announced the Next Phase in Driverless Cars: No Steering Wheel or Brake Pedals.
Google’s prototype for its new cars will limit them to a top speed of 25 miles per hour. The cars are intended for driving in urban and suburban settings, not on highways. The low speed will probably keep the cars out of more restrictive regulatory categories for vehicles, giving them more design flexibility.

Google is having 100 cars built by a manufacturer in the Detroit area, which it declined to name. Nor would it say how much the prototype vehicles cost. They will have a range of about 100 miles, powered by an electric motor that is roughly equivalent to the one used by Fiat’s 500e, Dr. Urmson said. They should be road-ready by early next year, Google said.

Google hopes to persuade regulators that the cars can operate safely without driver, steering wheel, brake or accelerator pedal. Those cars would rely entirely on Google sensors and software to control them.
Taxis Targeted

Google's cars come equipped with elaborate sensors that can see 600 feet in every direction, are fully electric, and have a range of about 100 miles, perfect for city use, especially driverless taxi cabs. Google plans for 2017 operation.
Last year, Lawrence D. Burns, former vice president for research and development at General Motors and now a Google consultant, led a study at the Earth Institute at Columbia University on transforming personal mobility.

The researchers found that Manhattan’s 13,000 taxis made 470,000 trips a day. Their average speed was 10 to 11 m.p.h., carrying an average of 1.4 passengers per trip with an average wait time of five minutes.

In comparison, the report said, it is possible for a futuristic robot fleet of 9,000 shared automated vehicles hailed by smartphone to match that capacity with a wait time of less than one minute. Assuming a 15 percent profit, the current cost of taxi service would be about $4 per trip mile, while in contrast, it was estimated, a Manhattan-based driverless vehicle fleet would cost about 50 cents per mile.

Driverless Cars on UK Public Streets Starting January

The BBC reports UK to Allow Driverless Cars on Public Roads in January.
The UK government has announced that driverless cars will be allowed on public roads from January next year. It also invited cities to compete to host one of three trials of the tech, which would start at the same time.

Business Secretary Vince Cable revealed the details of the new plan at a research facility belonging to Mira, an automotive engineering firm based in the Midlands.

"Today's announcement will see driverless cars take to our streets in less than six months, putting us at the forefront of this transformational technology and opening up new opportunities for our economy and society," he said.

The US States of California, Nevada and Florida have all approved tests of the vehicles. In California alone, Google's driverless car has done more than 300,000 miles on the open road.

In 2013, Nissan carried out Japan's first public road test of an autonomous vehicle on a highway.

And in Europe, the Swedish city of Gothenburg has given Volvo permission to test 100 driverless cars - although that trial is not scheduled to occur until 2017.

Competition cash

UK cities wanting to host one of the trials have until the start of October to declare their interest. The tests are then intended to run for between 18 to 36 months. A £10m fund has been created to cover their costs, with the sum to be divided between the three winners. Meanwhile, civil servants have been given until the end of this year to publish a review of road regulations.
Taxi, Truck Drivers First To Go

Taxi drivers, truck drivers, and mining operators will be the first to go.  I have written about this many times, and was largely dissed.

But the future advances relentlessly. My target of 2020 no longer looks optimistic; it looks pessimistic.

Further Discussion

All of the above will be in widespread usage by 2020. Personal cars will likely be the last affected. Taxis and commercial trucks will be first because eliminating the driver eliminates a huge expense.

Millions of drivers will lose their jobs. Inflationary? Hardly.

Mike "Mish" Shedlock 

Fannie Mae: Mortgage Serious Delinquency rate declined in June, Lowest since October 2008

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in June to 2.05% from 2.08% in May. The serious delinquency rate is down from 2.77% in June 2013, and this is the lowest level since October 2008.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Last week, Freddie Mac reported that the Single-Family serious delinquency rate declined in June to 2.07% from 2.10% in May. Freddie's rate is down from 2.79% in June 2013, and is at the lowest level since January 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

Fannie Freddie Seriously Delinquent RateClick on graph for larger image

The Fannie Mae serious delinquency rate has fallen 0.72 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in late 2015 or early 2016.

Note: The "normal" serious delinquency rate is under 1%.

Maybe serious delinquencies will be back to normal in 2016.

Preview: Employment Report for July

Friday at 8:30 AM ET, the BLS will release the employment report for July. The consensus, according to Bloomberg, is for an increase of 233,000 non-farm payroll jobs in July (range of estimates between 200,000 and 280,000), and for the unemployment rate to be unchanged at 6.1%.

Note: The BLS reported 288,000 payroll jobs added in June with the unemployment rate at 6.1%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 218,000 private sector payroll jobs in July. This was below expectations of 235,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth slightly below expectations.

• The ISM manufacturing and non-manufacturing employment indexes for July will be released after the employment report this month. The ADP report indicated a 3,000 increase for manufacturing jobs in July.

Although the ISM reports are not available, the regional manufacturing surveys were all positive on employment for July (even the disappointing Chicago PMI improved on employment).

Initial weekly unemployment claims averaged close to 302,000 in July, down from 316,000 in June. For the BLS reference week (includes the 12th of the month), initial claims were at 303,000; this was down from 314,000 during the reference week in June.

The lower reference week reading suggests some upside to the consensus forecast.

• The preliminary July Reuters / University of Michigan consumer sentiment index decreased to 81.3 from the June reading of 82.5. This is frequently coincident with changes in the labor market, but there are other factors too.

• On small business hiring: The small business index from Intuit showed a 15,000 increase in small business employment in July.  From Intuit:
U.S. small businesses added 15,000 jobs in July, bringing the number of new jobs added over the last six months to more than 90,000. While 610,000 jobs have been added since the small business recovery began in March 2010, small business employment remains 870,000 jobs below its peak in March 2007.
"This month's employment increase shows additional progress." said Susan Woodward, the economist who works with Intuit to create the indexes. "Things continue to get better, but slowly. The jobs added by small business over the most recent six months, including July, are more than double what we saw over the prior six months."
• A few comments from Merrill Lynch economists:
We look for nonfarm payrolls to increase 250,000 in July, a slight slowdown from the three-month average of 272,000. The unemployment rate will likely hold at 6.1% while average hourly earnings edge up a trend-like 0.2% mom. This will translate to a 2.2% yoy pace for wage growth. The wage data will be in focus – despite the continued notable drop in the unemployment rate, wage growth has remained lackluster. This suggests that there is indeed spare capacity in the labor market, which can be seen by the large number of discouraged and marginally attached workers. We should therefore continue to look at these broader measures of unemployment, which have improved but remain historically elevated.

The early indicators of the labor market look healthy: initial jobless claims continued to slide lower while the regional manufacturing surveys showed a pickup in hiring. Furthermore, the labor differential has been improving, falling to -17.1 in June — the best since the summer of 2008, when the recession was just getting underway. In particular, we look for private payrolls to be up 235,000 while government jobs expand by 15,000, driven by state and local hiring. Special focus will be construction and retail jobs — we think the risk is that construction hiring looks sluggish, in part due to seasonal adjustment issues. Retail job growth should improve, but may look soft relative to the recent trend.

Within the household survey, we look for some slowdown in household job growth after the strong 407,000 gain in June. However, we think job creation will still look strong in this more volatile survey. The labor force participation rate was little changed last month and we think the risk is that it inches up slightly; however, we have been surprised by the continued weak trend in participation. Hence, we wouldn’t be surprised if the unemployment rate fell by another tenth.
• Conclusion: The ADP report was lower in July than in June - and below forecasts - but still fairly solid.  Weekly unemployment claims were at the lowest level during the reference period in a number of years. However the Intuit small business index showed somewhat less hiring in July.

There is always some randomness to the employment report, but the I'll take the under on the consensus forecast of 233,000 nonfarm payrolls jobs added in July. 

Sanctions Starting to Bite the Hands That Promoted Them

As I have said on numerous occasions, sanctions are a lose-lose game. So it is not surprising in the least to discover Russian Crisis Already Taking Toll on Western Businesses.

  • Shares in Adidas, the world’s second-largest sportswear group, dropped 15 per cent after the company issued a profit warning and said it would accelerate the closure of stores in Russia because of increasing risks to consumer spending in the region.
  • Volkswagen, Europe’s biggest carmaker by sales, reported an 8 per cent decline in sales in Russia in the first half of the year, compared to the same period a year earlier.
  • Joe Kaeser, chief executive of Siemens, warned geopolitical tensions including those in Ukraine posed “serious risks” for Europe’s growth this year and next.
  • Metro, the eurozone’s second-largest retailer, said events in Russia were creating risks for the group as it revealed sales had declined sharply in Ukraine.
  • Royal Dutch Shell’s chief executive Ben van Beurden said that along with other western oil majors he was assessing the impact of tightening sanctions on Russia’s energy sector imposed by the US and EU.
  • Erste Group, the third-largest lender in emerging Europe, warned the turmoil could impact banks in eastern Europe. “I can’t exclude any nasty surprises in the region due to political decisions or developments,” said Erste chief executive Andreas Treichl. “If the crisis accelerates of course we will have to revise our forecast for all over Europe in 2015 and 2016.”
  • The German machinery association, VDMA, lowered its forecast for growth in the industry this year as it said the Russian situation was starting to affect bilateral trade and weigh on demand in important sales markets.
  • Last week, Visa cut its fourth-quarter sales guidance, partially because of lower than expected cross-border transactions in Russia and Ukraine.
  • Bank of America has almost halved its exposure to Russia this year to $3.9bn.
  • ExxonMobil, which is developing a large liquefied natural gas export facility at Sakhalin in Russia’s far east, said it was awaiting further details to understand the effect of sanctions designed in part to prevent the transfer of new technology to Russia’s oil and gas industry.
  • In the City of London, bankers warned it was not feasible for Russian companies to list on the London Stock Exchange until a de-escalation of the crisis.

Russian Response

Bloomberg reports Russia Eyes Banning U.S. Chicken And Some European Fruit.
Facing tougher sanctions over Ukraine, Russia said yesterday it may ban imports of chicken from the U.S. and fruit from Europe and is investigating McDonald’s Corp. (MCD) cheese for safety.

Meanwhile, a Russian lawmaker has drafted legislation that might result in U.S. accounting firms such as Deloitte LLP and KPMG LLP being barred from doing business in his country.

While Russia and the U.S. have long sparred over agricultural trade, the actions fueled speculation they could be retaliatory. The 28-nation European Union and the U.S. plan to impose stiffer sanctions to punish Russian President Vladimir Putin’s government.

“It’s a troubling continuation/expansion of trade as a geopolitical tool,” Gary Blumenthal, president of World Perspectives Inc., a Washington-based agricultural consulting firm, said in a phone interview.
Geopolitical Madness

Sanctions are a form of Chicken Coupled With M.A.D.

So far, the damage is minimal, but if Putin angrily cuts off natural gas flows to Europe, or raises prices in response, all hell will break lose.

Mike "Mish" Shedlock

The Inter-Market (by Faces In Cabs)

I began visiting Slope of Hope back in 2007.  I opened my first trading account in 1999, began trading my own money, and started learning about fundamental investing by subscribing to IBD (Investor’s Business Daily) and the Motley Fool.  By 2002, I began learning about technical analysis through Stockcharts.  For years now, I have maintained [...]
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