$('.icon-tooltip').tooltip();In a speech last Thursday, Governor Jerome Powell expressed some concern that QE “might drive excessive risk-taking or create bubbles in financial assets or housing.” He indicated that the Fed’s staff is closely monitoring valuation metrics in various asset markets.
Regarding the stock market, he said: “By most measures, equity valuations seem to be within a normal range. Whether one looks at trailing or forward price-to-earnings ratios, equity risk premiums, or option prices, there is little basis for arguing that markets show excessive optimism about future returns. Of course, in the equity markets there is always downside risk.” I tend to focus on forward P/Es, which suggest that stocks are neither cheap nor expensive.
As for home prices, Powell said that the Fed's staff tracks a model that compares them to rents. I tried to duplicate it by dividing the median existing home price by the tenant rent component of the CPI. My results come close to Powell’s statement on this subject: “At the peak of the bubble, house prices were more than 40 percent above their usual relationship to rents, according to one model that the Fed staff follows. At their trough, house prices had fallen about 10 percent below fair valuation. Given the price increases over the past year, they are--by the lights of this one model--moving back into the approximate neighborhood of fair valuation.”
On the other hand, Powell was concerned about excesses in the credit markets. He mentioned Governor Jeremy Stein’s speech on this issue earlier this year. He added, “These concerns have diminished somewhat as rates have risen since mid-May.”
Today's Morning Briefing: The Usual Suspects. (1) Opera or detective drama? (2) Lots of witnesses with different stories. (3) Nineteen photos on the story board. (4) Forsyth’s theory: Deflating asset bubbles. (5) Inconclusive evidence. (6) Fisher and Dudley on same page for a change. (7) Powell says equities and homes are fairly valued. (8) Powell agrees with Stein on credit excesses. (9) Stein clams up and recants. (10) The cover story covers all the bases. (11) Fed model says QE is a dud! (12) Flows vs. stocks. (13) The year’s winners and losers so far. (More for subscribers.)
REUTERS/StringerPeople play chess in front of an electronic board showing stock information at a brokerage house in Hefei, Anhui province, February 18, 2013. China is the second largest economy in the world, and it is one of the fastest growing ones as well.
It is also an incredibly dynamic and complicated economy with many moving parts.
We recently got more evidence that suggests China's economy is decelerating. Indeed, concerns are piling up as interest rates rise and its super hot housing market begins to cool.
Morgan Stanley's Asia Pacific research team led by Martin Yule recently published its massive 72-page China Pulse Chartbook.
As we all keep a close eye on China, Yule's team offers "Eight Charts To Remember."
1. SHIBOR: This is the LIBOR of China. Some pundits have noted that LIBOR spiked before Lehman Brothers went bankrupt in 2008.
Morgan Stanley
2. The Hong Kong stock market: Stock markets in the area have become extremely volatile, reflecting the shifting expectations of investors.
Morgan Stanley
3. MSCI China Index: With the economy slowing, earnings growth expectations have also been coming down.
Morgan Stanley
4. Loans: Lending activity is perhaps the most reliable and crucial leading indicator of economic activity in the country.
Morgan Stanley
5. Steel Mill Output: This is closely tied to the buildout of China's infrastructure.
Morgan Stanley
6. Housing Starts: Building remains high as the standard of living improves. However, overbuilding and too much leverage are lingering concerns.
Morgan Stanley
7. Retail Sales: As the country shifts from being an investment-driven economy to being a consumption-driven economy, retail sales should continue to grow rapidly.
Morgan Stanley
8. Rail Freight: Everywhere in the world, transportation companies are considered reliable bellwethers of economic activity. In China, it debunks or confirms other economic reports, which may be less reliable.
REUTERS/StringerPeople play with pigeons at a park in Wuhan, Hubei province, April 10, 2013.Any way you look at it, the two Chinese manufacturing reports we just got were not great.
The official China manufacturing PMI index fell to 50.1 in June from 50.8 in May. This was right in line with expectations, but nevertheless reflects a sector that is just barely growing.
The unofficial HSBC PMI index fell to a 9-month low of 48.2. This sub-50 reading signals contraction.
While worries about China's economy had been lingering for quite a while, it was only in recent weeks that interbank lending rates spiked sparking fears of a liquidity crunch in the world's second largest economy.
But it would be a mistake to go as far as to think that China was doomed for a hard economic landing. Here's Bank of America Merrill Lynch's Ting Lu:
...The 50.1 PMI reading in June could also help convince policymakers to end the self-inflicted interbank liquidity crunch as soon as possible.
A key question is whether we should consider lowering our GDP growth forecasts (currently 7.6% for both 2013 and 2014; 7.7%, 7.6% and 7.6% for 2Q, 3Q and 4Q in 2013). At the moment, we do see more downside risks then before, but a downward revision is not justified yet for three reasons. First, the PBoC has already committed to ending the interbank liquidity squeeze and the State Council has come out asking for growth stability. Second, we expect the deleveraging of small banks in coming months to have a limited impact on system-wide credit supply as big banks could fill the gap. Third, pessimistic sentiment during the PMI survey around 20 June could also impact the survey results even the real economy could have been better.
Much of Lu's optimism hinges on the ability of China's leaders to navigate the economy in the right direction. Indeed, many have argued that the reason why rates are rising is because China wants to cool Chinese lending.
MarkitThe unofficial China HSBC manufacturing PMI report for June 2013 is out.
The headline number fell to a 9-month low of 48.2 from 49.2 in May.
This was a hair below economists' forecast for 48.3.
Any reading below 50 signals contraction.
Here are the key points from Markit:
Output contracts for first time since last OctoberNew export orders fall at the joint-fastest rate since March 2009Job shedding intensified
"Falling orders and rising inventories added pressure to Chinese manufacturers in June," said HSBC's Hongbin Qu. "And the recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending, further exacerbating funding conditions for SMEs. As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months."
Earlier today, we learned that the official NBS China manufacturing PMI fell to 50.1 from 50.8 in May.
The official number is more exposed to the larger, state owned enterprises, which tend to have an easier time accessing credit.
Indeed, interest rates have been on the rise in China. This is making it harder to operate as a small or medium-sized enterprise (SME) in the country.
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Markets More: Monday Scouting Report It's A Massive Week For The US Economy — Here's Your Ultimate Preview Sam Ro Jul. 1, 2013, 12:05 AM 1,926 Tweet!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0];if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs");EmailShare on Tumblr MONDAY SCOUTING REPORT This post is part of the "Monday Scouting Report" series, a weekly look at the stories and issues that most affect mid-market businesses. "Monday Scouting Report" is sponsored by GE Capital.See more Monday Scouting Reports >>
REUTERS/Rick Wilking
Job seekers listen to a presentation at the Colorado Hospital Association health care career fair in Denver April 9, 2013.This week begins the third quarter. And there are tons of crucial economic events scheduled.
But in the wake of all of this talk about the Federal Reserve reducing its stimulative bond-buying program (i.e. tapering QE), the biggest report without question will be the U.S. jobs report, which comes out on Friday.
"Most importantly, markets and the Fed are now even more highly dependent on sustained evidence that the real economy is indeed on a solid improving trends, including a consequential rise in actual and expected nominal GDP growth," said PIMCO's Mohamed El-Erian. "With that, the focus will now shift firmly to the forthcoming June jobs report; and it will be even more intensive than usual."
It's a holiday shortened week in America. But it's jobs week in America.
"Fireworks are a given, even without minor considerations like the 4th of July!" exclaimed Societe Generale's Kit Juckes.
Top Stories
The State of Fedspeak: "There have been a lot of Fed speakers since the June meeting, including both Bank presidents and governors," said Vincent Reinhart, Morgan Stanley's Chief U.S. Economist and former Fed insider. "Reassurance was in ample supply. We learned that the Fed cares about the pace of economic growth, worries about disinflation, and monitors financial stability."
So, while Bernanke may have projected a tapering of QE for later this year, that could quickly change based on economic data. This is why the June jobs report is so crucial.The June Jobs Report: Economists estimate that U.S. companies added 165,000 nonfarm payrolls in June, down from the 175,000 added in May. They also believe the unemployment rate improved to 7.5% from 7.6% a month ago. Here's what economists are saying: -Joe LaVorgna, Deutsche Bank (+145): "Historically, June nonfarm payrolls have tended to be weak, possibly reflecting the difficulty in seasonally adjusting the data for the entry of students and the exiting of teachers ahead of the summer recess. In point of fact, the strongest reading we have seen in the initially reported change on June nonfarm payrolls going back to 2000 has been just +146k (June 2005)." -Paul Dales, Capital Economics (+150k): "The wildcard, as is always the case in June, is whether more or fewer school leavers than normal entered the ranks of the employed rather than the unemployed." -Vincent Reinhart, Morgan Stanley (+165k): "We expect the Employment Report to reflect the slight deterioration in jobless claims between mid-May and mid-June. So, we see nonfarm payrolls increasing only 165,000 in June (vs. 175,000 in May). However, the unemployment rate should decrease to 7.5% as the job growth we’re expecting should outpace the uptick in the participation rate." -Kevin Cummins, UBS (+155k): "Government furloughs associated with Federal sequester should not have an impact on the payroll report. In the establishment survey, people are counted as employed if they work at any time during the payroll survey period. Nor should any sequester-related furloughs impact the workweek measure because the workweek is limited to private industries." -Brian Jones, Societe Generale (+190k): "Reflecting an estimated 145,000 reduction between household surveys in the number of persons receiving state and federal unemployment insurance benefits, our augmented insured unemployment measure dropped from 3.75% in May to 7.64% June... The aforementioned projected drop in benefit recipients implies stronger hiring." -John Silvia, Wells Fargo (+153k): "Some of the largest employment gains have been in lower-paying industries, such as administrative and waste services, which have contributed to modest wage growth. On average, the economy has been adding just short of 190,000 jobs each month this year, although February’s large reading overstates the general trend." -Jan Hatzius, Goldman Sachs (+150k): "Our forecasts for the US dataset to be released this week will likely be mixed for rates... we think that payrolls will likely disappoint market expectations." -Jim O'Sullivan, High Frequency Economics (+175k): "That said, a rise in payrolls of 160K-to-170K or more would likely encourage expectations for tapering, while a number below 160K would discourage them."
Economic Calendar
Markit PMI (Monday): Economists estimate PMI climbed to 52.4 in June from 52.2 in May.ISM Manufacturing (Monday): Economists estimate that the ISM climbed to 50.5 in June, up from 49.0 in May. "[The] ISM should recover modestly given the improvements in the New York, Philadelphia, Richmond and Dallas Fed manufacturing surveys in June," said Deutsche Bank's Joe LaVorgna. "However, the projected ISM gain could be limited based on what we saw in the Chicago PMI, which is statistically the best regional predictor of the ISM. Recall the June Chicago PMI fell 7.1 points to 51.6 on broadbased weakness."Factory Orders (Tuesday): Economists estimate that orders climbed +2.0% in May. "Durables orders have been reported up 3.6%; we forecast flat nondurables," said High Frequency Economics' Jim O'Sullivan.Vehicle Sales (Tuesday): Economist are looking for a seasonally adjusted annual rate of 15.45 million units in June, up from 15.24 in May. "A powerful combination of improving labour-market conditions, pent-up 30 demand and ample dealer stocks probably propelled light vehicle sales 3.4% higher to a seasonally adjusted annual rate of 153/4 million in June – the highest level since November 2007," said the analysts at Societe Generale.ADP (Wednesday): Economists are looking for 160,000 new private payrolls in June, up from 135,000 in May. "Private payrolls rose 40K more than the ADP estimate last month; misses have averaged 42K since Moody’s became the compiler of the data," said Jim O'Sullivan.ISM Non-manufacturing (Wednesday): Economists are looking for a reading of 54.0 in June, up from 53.7 in May. "Service-sector canvasses conducted by the Federal Reserve Banks of Dallas and Richmond suggest that the ISM’s non-manufacturing activity gauge likely rose to five-month high of 54.5 in June," said Brian Jones.NO DATA ON THURSDAY, MARKETS CLOSED FOR JULY 4TH HOLIDAY.Jobs Report (Friday): Economists estimate U.S. companies added 165,000 nonfarm payrolls in June, up from 175,000 in May. They also expect the unemployment rate fell to 7.5% in June from 7.6% in May. For details, see above.
Market Commentary
"[E]arnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention," said Citi's Tobias Levkovich in a note to clients last week. "In this respect, we have been a tad shocked by the surge in negative-to-positive preannouncement trends that make 2009’s surge appear less worrisome in retrospect. Upward earnings guidance has dipped as well and there has been little consternation or discussion about it."
So, what's behind all of this disappointing guidance?
"For Q2 2013, 55 companies have issued negative revenue guidance for the quarter and 14 have issued positive revenue guidance," said FactSet's John Butters. "As a result, 80% (55 out 69) of the companies that have issued revenue guidance for the quarter have issued negative guidance. If this is the final percentage for the quarter, it will mark the third highest percentage since 2006."
Based on corporate commentary, much of the weakness is coming from Western Europe and the major emerging markets (i.e. China, Brazil, India).
SEE ALSO: Wall Street's Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD
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$('.icon-tooltip').tooltip();In a speech last Thursday, Governor Jerome Powell expressed some concern that QE “might drive excessive risk-taking or create bubbles in financial assets or housing.” He indicated that the Fed’s staff is closely monitoring valuation metrics in various asset markets. 
REUTERS/StringerPeople play chess in front of an electronic board showing stock information at a brokerage house in Hefei, Anhui province, February 18, 2013. China is the second largest economy in the world, and it is one of the fastest growing ones as well. 
Morgan Stanley
Morgan Stanley
Morgan Stanley
Morgan Stanley
Morgan Stanley
Morgan Stanley
Morgan Stanley
Morgan Stanley
REUTERS/StringerPeople play with pigeons at a park in Wuhan, Hubei province, April 10, 2013.Any way you look at it, the two Chinese manufacturing reports we just got were not great. 
MarkitThe unofficial China HSBC manufacturing PMI report for June 2013 is out. 
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