Merrill Lynch - Dave's Top Ten
10 December 2004
David A. Rosenberg
First Vice President
Chief North American Economist
[Mish - Here is your favorite analyst. Enjoy :-) ]
This research product summarizes the 10 major macro themes of the past week
as a prelude to our weekly publication the Market Economist.
1. The holiday shopping season is lacking some cheer – that seems more evident
of the day: ICSC-UBS weekly chain store sales reported -1.7% in the week
ended Dec. 4 (and down 2.8% from the November average). The year-on-year
rate rose to 3.3%, but that was only due to easy comps from the year before
when winter storms suppressed sales. The Redbook survey for the same week
showed sales -0.8% vs. November and retailers reporting sales are coming in
below plan (which was flat). Does not point to a robust holiday sales season.
And likely spells further aggressive discounting in the weeks to come. Add on
lower oil and the implications for auto pricing from GM’s 100+ DS and we
could have a couple of negative CPI prints on our hands – now how bondbearish
is that?
2. We got this from Dan Barry and it was a gem: Brit Beemer, Chairman and
founder of America's Research Group, a highly regarded consumer research
organization, spoke Monday at the Merrill Lynch Christmas Countdown Call.
After conducting over 800 interviews with shoppers over the last two weekends,
he found that according to customer surveys, the number of consumers who
went shopping last weekend was at an all time low. Brit estimates a 3.2% comp
increase this Christmas compared to a 3.8% gain last year), but is concerned
since over the first two weekends of the holiday, retail sales are flat now and
may even be in negative territory. Consumer procrastination is a theme – this
year 30% of Americans are waiting to finish their shopping by Christmas Eve,
however, 66.2% of those consumers say that they are waiting for big discounts
of 50% off, and if doesn't come they will slice their spending by as much as 60%
to 70%. Oh – but there's rampant inflation, didn't you know?
3. Economists raising their Q4 GDP forecasts due to lower oil prices: The
Bloomberg consensus now at 3.8% SAAR from 3.5% in last month's survey –
citing lower oil prices as the primary reason (better go check those weather
reports). Meanwhile, the only fresh information we really have is (i) weakerthan-
expected employment and earnings growth in November plus downward
revisions and (ii) a disappointing start to the holiday shopping season. We'll
stick at 3.5%.
4. Today’s layoff announcements are tomorrow’s jobless claims: For the
third month in a row, Challenger layoffs exceeded 100,000 in November –
ringing in at 104,530. Government (21,971 from 2,994 – likely due to
election workers), telecom (21,158 from 16,664) and automotive (11,824
from 5,638) led the way. Just wait until Colgate shows through with its 4,440
job cut (12% of its workforce). Now with or without government, these are
massive layoff numbers and could well influence the path of nonfarm payrolls
next year in the absence of a hiring boom. But the 104,530 number in
November compares with a typical non-recession November (adjusted for the
size of the labor force) of 68,000, 50% above the norm. Same thing for
October – the 101,840 print for layoff announcements was well above the
typical 81,000 for that time of year. And in September, when layoffs spiked
to 107,863, this again was almost double the 59,000 we usually see for that
particular month. Last month, the largest increase regionally by a country
mile was the Midwest (50,304 from 27,324 … hey, now that the election's
over ...).
5. Five reasons why the November nonfarm payroll report may beget more
soft numbers to come:
• There were 54k downward revisions to the prior two months – revisions to
back-data tend to be pro-cyclical developments.
• The hiring diffusion index slumped from 58.8 in October to 51.8 in November
– the lowest since Dec/03.
• Temp agency hirings only rose 9k, the weakest in five months and second
softest in ten – and well below the average of +30k over the prior three
months.
• The workweek fell back to a three-month low of 33.7 hours from 33.8 – hours
tend to presage bodies.
• Average duration of unemployment rose to a five-month high of 19.9 weeks
from 19.6 – so it’s basically getting tougher, not easier to find a new job
6. Despite the soft payroll number, all 22 economics departments at the
primary dealers see the Fed going on December 14th. We are part of that
overwhelming consensus, given the markets are fully priced for the event and
Fed officials are doing nothing to ‘talk’ the market of out of it. And the Fed
futures contract is still priced 96% of the way for a Fed hike in December
14th and almost 90% sure that we well be at 2 1/2% on funds by the Feb 2nd
confab. Only the out-meetings were affected by Friday’s nonfarm number –
the market believes there is a 50% chance now that the Fed skips the March
22nd FOMC meeting, though it still sees (slightly more than) 100% chance
that the funds rate will be up to 2 3/4% by the May 3rd meeting. In other
words, investors are looking for the Fed to go in 3 of the 4 next meetings and
a 15% chance that it goes at every meeting.
7. This cycle, an output gap remains even as we approach the start of year 4
of the ’recovery’. The consumer lacks the fundamentals and the pent up
demand to support above-trend growth rates and the corporate sector is about
to go ex-stimulus, and the US is too much of a closed economy (and foreign
economies too weak on the domestic demand side) for net trade to do it all.
The bottom line is that 3%ish growth rates are not going to cut it anymore in
so far as generating meaningful inflation pressures...which begs the question
why the Fed is tightening and means the consensus remains too bearish on
bonds. So in terms of the inflation debate, put us down in the camp which
says we'll have a cycle...someday. But like those who said it would be in
2003, then 2004, and now 2005... we'll say the same thing – when the
US/global output gap is closed and if all this liquidity is still around, we'll get
inflation. Perhaps it will be a 2006/2007 story, but not before then.
8. Inflation should not be the Fed’s primary concern right now: Please just
read the front page of the Saturday NYT business section (“Coupons in Hand,
Shoppers Welcome Markdowns”). The article concludes that markdowns are
now running 5% higher than they were this time last year. JC Penney was
offering discounts as steep as 50% on women’s dresses this past weekend
(according to Bloomberg) and Sears cut prices by 10% on most items. If we
recall, the Fed was telling us how ‘considerably patient’ it could be at that
time. While lower oil prices would help the consumer, if sustained, the reality
is that average retail heating oil price rose 0.5% in the week ending November
29th (DoE data) to stand 44% above year-ago levels.
9. The spread between U.S. and German 10-year note yields has surged to
over 60 bps from close to ’par’ back in September: For all the talk of how
'overvalued' the U.S. Treasury market is, German 10-year bund yields have
plunged to 3.64% – and the U.S. has (i) the same core inflation rate; (ii) the
same policy rate (for now), and (ii) a larger output gap. But it's not just a
currency story – it also comes down to relative monetary policy expectations,
with the prevailing view that the ECB is in hold for a very long time and that
the Fed will not only go next week but early next year as well.
10. For all the talk of how tech is ’growth’, did you know that since 1998, the
sector has recorded EPS growth (reporting basis) of 0.9% at an annual
rate? Energy, meanwhile, delivered the goods for patient investors who
waited out that painful period heading into the early-1999 low in WTI – 34%
annualized earnings growth. Basic materials EPS has risen an impressive
23% annualized rate. Health care, despite some recent setbacks, has delivered
12% SAAR earnings gains. Financials have posted 8.3% average annual
earnings growth and the best performing group among the rate-sensitives.
Industrials +7.4% and consumer discretionary with sub-5% annualized EPS
growth were laggards among the cyclicals. |
