The eurozone is looking better. Japan is looking worse. Brazil is a nightmare. The U.S. is muddling along, though the upcoming earnings season is likely to be a downer.
Commodity prices are rebounding, with lots of different opinions about whether the price of oil is headed to $50 or to $25.
Any questions? Let’s have a closer look:
(1) Eurozone showing signs of life.
The Europeans may be getting numbed to recurring terror attacks. The one that occurred in Paris on November 13, 2015 didn’t seem to have any impact on the French economy. Yesterday’s wave of bombings in Brussels was horrific too, but Europeans are likely to carry on and keep calm as they have after numerous previous terror attacks. They are likely to be less calm about the onslaught of migrants pouring in from the Middle East and the terror cells in neighborhoods that have become enclaves for Islamic Jihadists.
Terrorism continues to spread out of the Middle East (in places like Iraq, Israel, and Turkey) to the rest of the world. The world is likely to react with more anti-immigration, anti-trade, nationalistic political reactionaries grabbing power. If he is chosen to be the Republican nominee for president, Donald Trump undoubtedly will have lots of campaign ads asking Americans whether they would feel safer under his leadership or under that of the woman who was asleep during Benghazi.
The EMU MSCI stock price index (in euros) actually rose 0.1% yesterday. It is up 14.0% since this year’s low on February 11, when its forward P/E fell to 12.2. This valuation multiple is back up to 13.8, but well below the current bull market’s peak of 16.4 on April 16, 2015. Revenues per share (in euros) has been declining since mid-2015. The same goes for earnings per share.
All in all, not very bullish stuff, other than the relatively low P/E, which can be attributed to Europe’s migrant crisis, terrorism, the possibility of a Brexit, ongoing Greek bailouts, and lackluster growth — despite Draghinomics including QE, negative interest rates, and TLTRO II.
Yesterday, we learned that the flash composite PMI edged up in the Eurozone from 53.0 during February to 53.7 this month. That was mostly attributable to a rise in the French index from 49.3 to 51.1. The German index was unchanged at 54.1.
Interestingly, the Eurozone’s manufacturing component (M-PMI) ticked up from 51.2 to 51.4 (Fig. 6). However, the German M-PMI ticked down from 50.5 to 50.4, while the French M-PMI also slid — to below 50.0: from 50.2 to 49.6. On the other hand, as Debbie discusses below, Germany’s Ifo business confidence index ticked up in March after falling sharply during the previous three months. All the above suggests to us that the strong 2.1% gain in the eurozone’s production during January, which was led by Germany, might have been an aberration.
Then again, the volume of retail sales (excluding autos) in the Eurozone rose 2.0% y/y in January to the best reading since September 2008. In addition, passenger car registrations (on a 12-month sum basis) rose during February to the highest since September 2010 in the European Union.
(2) Japan is negative on negative rates.
In Japan, there has been a significant political backlash against the NIRP (negative interest-rate policy) imposed by the BOJ on January 29. The economic reaction has also been negative. The consumer confidence index fell during February to the lowest since January 2015. The flash M-PMI fell to 49.1 during March, the lowest since February 2013.
(3) Brazil implodes while stocks party.
A March 22 CNN article was titled “Brazil descends into chaos as Olympics looms.” It’s a grim story: “An increasingly uncertain political backdrop is sparking widespread, and sometimes violent, protests. The country is in the midst of its worst recession in 25 years. A massive corruption scandal involving its biggest company has engulfed numerous executives and politicians. Add to that the deadly Zika virus, and you have a country in crisis mode. Concerns are rising over whether Brazil will be adequately prepared for this seminal global event. The International Olympic Committee told CNNMoney Friday that it is ‘very closely’ watching the political events unfolding.”
Brazil’s manufacturing output has plunged 19% since June 2013 through January of this year. That’s the lowest since January 2009. The volume of retail sales is down 10.3% y/y through January.
Investors seem to believe that Brazil’s problems are all coming to a head and that now is a good time to buy stocks. The forward earnings of the Brazil MSCI has been on a downtrend since 2011. The price index is up 34.0% from this year’s low on January 26 as the forward P/E rebounded from 8.7 to 11.5. How do you say “lots of luck” in Portuguese?
(4) U.S. remains resilient.
Meanwhile, with the exception of Donald Trump rallies, the US is an island of tranquility. The Citigroup Economic Surprise Index has rebounded sharply from a recent low of -55.7 on February 5 to -4.1 yesterday. Below, Debbie reports that three of the five regional business surveys conducted by the Fed districts are available for NY, Philly, and Richmond. March’s average of their composite indexes was positive for the first time in eight months. Also impressive is that initial unemployment claims averaged just 268,000 over the past four weeks through the week of March 12. Jobless claims, even in the major oil-producing states, remain subdued, suggesting that job losers in the oil patch are having no problems finding jobs elsewhere.
(5) Commodities bungee with the dollar.
Another promising development is the V-shaped recovery in the CRB raw industrials spot price index. It is up 11.5% since its recent bottom on November 23. Debbie and I have been arguing that its plunge since mid-2014 probably reflects too much supply of commodities rather than a plunge in global economic activity. We’ve also frequently noted that it is highly inversely correlated with the trade-weighted dollar. Miners have been scrambling to cut their production, and the dollar has dropped 4.5% since making a high this year on January 20. Global economic growth remains subpar, as suggested by our update above.
A March 21 FRB-NY article on this subject titled “What Tracks Commodity Prices” corroborates our view as follows: “Various news reports have asserted that the slowdown in China was a key factor driving down commodity prices in 2015. It is true that China’s growth eased last year and, owing to its manufacturing-intensive economy, that slackening could reasonably have had repercussions for commodity prices. Still, growth in Japan and Europe accelerated in 2015, with the net result that global growth was fairly steady last year, casting doubt on the China slowdown explanation. An alternative story relies on the strong correlation between the dollar and commodity prices over time. A simple regression shows that both global growth and the dollar track commodity prices, and in this framework, it is the rise of the dollar that captures last year’s drop in commodity prices. Thus a forecast of stable global growth and a relatively unchanged dollar suggests little change in commodity prices in 2016.”
(6) Earnings recovery.
The recent rebound in the dollar and in commodity prices should boost S&P 500 earnings per share (as compiled by Thomson Reuters). However, y/y comparisons, which turned negative during Q3-2015 with a decline of 0.2% and followed by a 3.1% drop during Q4-2015, are expected to decrease 7.1% this quarter and 1.7% next quarter by industry analysts. The market seems to be looking beyond this earnings recession at analysts’ forecasts of gains of 5.2% and 9.3% during the final two quarters of this year. They might be too optimistic since the rebound in commodity prices and the weakening of the dollar just started at the beginning of this year.
(7) Oil debate.
Of course, the outlook for earnings will also depend on the price of oil. The price of a barrel of Brent crude oil is up 50% since January 20. That should certainly boost earnings estimates for the S&P 500 Energy sector. The problem is that the sector has become very tiny, with its earnings share of the S&P 500 down to 2.3% from 8.1% at the start of 2014 and its market-cap share down to 6.9% from 8.5% over the same period.
All the experts who didn’t see how much the price of oil would plunge are now debating whether it might move above $50 to even $80 or retest the recent lows around $25. We have updated our Global Crude Oil Demand & Supply chart book with February data compiled by Oil Market Intelligence. The demand/supply ratio, which turned bearish in early 2014, remains bearish, with February’s reading the lowest since February 1999. Global oil demand growth, which rebounded last year in response to lower prices, seems to be slowing now, but it remains in record-high territory. Oil production in the U.S. plus Canada rose to a record high in February. Iran’s output is coming back rapidly.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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