Thursday
Jul312014

Weekly Market Update July 31, 2014

GDP 2nd Q 2014 1st estimate: On Wednesday this week, the Bureau of Economic Analysis, (BEA) released the advance estimate of Q2 2014 Annual Revision of the National Income and Product Accounts. In addition to the regular revision of estimates for the most recent 3 years and for the first quarter of 2014, GDP and select components were revised back to the first quarter of 1999. The total revision in GDP for the 15 ¼ years period from Q1 1999 through Q1 2014 was only $200B on $215T so overall very minor but there were substantial changes to individual quarters. Of most immediate note Q1 2014 was revised up from the “Final” evaluation of -2.96% to -2.1% and Q4 2013 was revised up from 2.6% to 3.5%.

Fig. 1 shows quarterly results since 1990 corrected for the latest revisions and the latest IMF forecast through 2018. The advance estimate for GDP growth in the second quarter was 3.89%, in line with Q3 and Q4 last year. GDP in Q2 this year based on this first estimate was $15.986 trillion. Last week the IMF reduced its growth forecast for the US in 2014 to 1.7% down from the April estimate of 2.8%. Based on the upward revision of Q1 and the very healthy result for Q2, (assuming it holds) the IMF can be expected to raise their forecast. Fig. 2 shows the change in the major subcomponents of GDP. Our interpretation is that Q1 was an outlier resulting from severe winter weather, a major inventory swing and a deterioration in net exports. These components reversed course in Q2 and in addition the contribution of personal consumption doubled from 0.83% to 1.69%.

  Fig 1

Fig 2

Non-residential Growth Forecast: Twice per year in January and July, seven entities estimate the rate of growth y/y for the non-residential sector. The estimates are broken down into several sub-categories to include: Commercial, Industrial and Institutional. Commercial and Institutional are broken down into further smaller sub-categories. The American Institute of Architects compiles the seven individual firms’ estimates and develops a consensus forecast, (Table 1). The July consensus forecast predicts a y/y growth of 4.9% for 2014 and 8.0% for 2015. The January 2014 consensus forecast called for 5.8% and 8.0%, a reduction of 0.9% for 2014 with no change in the 2015 prediction. Comparing the predictions in Table 1 reveals considerable variation between firms. For example on the top-line, overall non-residential construction in 2014 (with more than ½ the year over), the estimates range from a low of 2.5%, from Wells Fargo, to a high of 7.0% from Moody’s. Table 2 presents the change in prediction from the January iteration to July. There is relatively little variation for the overall category of non-residential construction, but considerable dissimilarity within the sub-categories. The firm with the lowest change in its 2014 estimate, -8.0% (add the entire column under the name), from its January to July estimate was McGraw Hill. Two firms had greater than a -40% change (add the entire column under the name), including: Reed, and Moody’s. The degree of change is far less for the 2015 growth estimate. Most firms revised in a flat or slightly downward direction for 2015 except for Moody’s, which increased its overall non-residential growth estimate by 1.6% to 8.1%, nearly identical to the consensus value of 8.0%.

Table 1

Table 2

NAFTA Reinforcing Bar Trade: For the five months ending May 2014, the U.S. exported 178,000 tons of rebar to Canada and 3,000 tons to Mexico. The U.S. was the recipient of 870,000 tons of offshore rebar, while exporting 153,000 tons to the rest of the world (ROW). For the five months ending May 2014, the U.S. was a net importer of 346,000 tons of rebar, (Fig. 3).

For the five months ending May 2014, Mexico sent 98,000 tons to the U.S and 14 tons to Canada. Mexico brought in 200 tons of offshore rebar, while exporting 230,000 tons to ROW, resulting in Mexico being a net exporter of 325,000 tons through May.

Canada exported a negligible amount to both the U.S. and Mexico and zero tons to the ROW over the first five months of the year. Canada received 74,000 tons from offshore suppliers. Net imports to Canada totaled 253,000 tons through May of this year.

Total offshore imports to NAFTA were 657,000 tons over the first 5 months of 2014. NAFTA exported a total of 383,000 tons to the ROW, therefore NAFTA was a net importer of 273,000 tons during this time. Offshore imports to NAFTA have trended sharply higher since 2011, (Fig. 4). The U.S. being the primary target. Fig. 5 presents the top six offshore countries exporting to NAFTA. Turkey was the biggest player up until the end of 2013. Year to date in 2014, Turkey has exported just 8,375 tons to NAFTA. So far in 2014, the top offshore exporters to NAFTA include: Spain, China and South Korea. In 2013 YTD. Rebar exports from China have more than doubled from 29,000 tons YTD 2013 to 66,000 YTD in 2014.

Fig 3 

Fig 4

Commercial Property Price Index: The CPPI rose to 204.3, a 12.8% y/y increase and its highest level since the CPPI commenced in December 2000 with a value of 100, (Fig. 6). According to Moody’s/Real Capital Analytics; Investment trends remained positive across all property types in Q2 with volume gains accelerating. Sales of significant commercial properties totaled $93.3 Bn, up 24% y/y. Individual property sales increased by 18%, while portfolio transaction jumped 48%. Sales for the first half of the year totaled $184.1 Bn, up 23% y/y which was just below the levels recorded in 2006. Volume in the retail sector surged by 57%, well above all other property types. The only sector to post a decline was apartments and that was a function of major portfolios inflating the y/y comparison. Developers are expanding beyond the apartment sector, acquiring over $10.0 Bn of developable land thus far in 2014, up 48% y/y. This should bode well for future non-residential construction activity.

Fig 6

U.S. Preliminary Imports, as reported by the S.I.M.A., show imports of long products fell 16% in June from May, with notable m/m import declines for all product groups. Imports YTD totaled 3.05 million tons vs. 2.43 million tons through May 2013. Wire rod imports were more than double the tonnage, imported YTD 2013. Structural shapes, including beams, were up 25% y/y. Rebar and MBQ imports increased by 10% y/y. SBQ was the only product import showing a downward trend, falling 4% y/y, (Table 3). S.I.M.A. does not have a product classification for MBQ or SBQ. Based on licenses vs. final imports, the trend over the last 24 months reflects an average 13.5% of imported Hot-Rolled Bars have been MBQ products, with the remainder as SBQ imports. This shows a significant shift from 2008, when MBQ was 30% of licensed hot-rolled bars.

Table 3

Consumer Confidence Index: The index rose to its highest level in seven years to 90.9, (Fig. 7). This is a 4.5 point increase over June. This is a 12.2% increase y/y in July. The Present Situation sub-index also rose in July to 88.3, its highest level since Q1 2008 and up 20% on a y/y basis. The Expectations sub-index also rose in July to 92.7, its highest level since Q1 2011 and has remained above 80 for five straight months. Despite the increases in consumer confidence, buying conditions fell across all three categories: auto, home, and appliance. Labor market conditions fared better with an increase in those who thought jobs were plentiful and an uptick in expected income increases. Net job creation has averaged 272,000 jobs a month over the last three months.

Fig 7

Jobless Claims: New unemployment claims rose to 302,000 for the week ending July 26th, one week after the figure dipped well below 300k for the first time since 2006. The four week moving average is 297,250, 13% lower on a y/y basis and the first time this figure is below 300k since Q1 2006. This figure helps smooth out weekly volatility in reporting. The four week moving average is roughly 45,000 new claims fewer on a y/y basis. Seasonally adjusted continuing claims rose to 2.54 million, 14% fewer claims on a y/y basis. This indicator has remained below the 3,000,000 mark for a majority of the past twelve months, with the four week moving average staying under the benchmark since July 2013, (Fig. 8).

Fig 8

Baltic Dry Index, the BDI measures the cost of moving commodities in the maritime sector. The theory being that when the BDI is rising, more commodities are moving around the world into manufacturing and supply chain operations. When it is dropping, the opposite is happening because demand is falling. The question is; is demand lower which signals a weaker period ahead or is there too much supply in the maritime sector. The answer is “Both of the above.” In July 29th The BDI was down by 61% since December and stood at 747, (Fig. 9). The Capesize and Panamax indexes are in similar dire straits, (Fig. 10). Since December 3rd the Capesize index is down by 64.0%, the Panamax by 64.2% and the Handysize by 54%. The following comment is from the Mid-Ship Report; most market players were hoping for a recovery in the second half of this year but for a majority that hope is evaporating. The expected demand has not yet materialized as new ships keep entering the marketplace forcing rates on almost every trade rout down to uneconomic levels.

Fig 9

Contributors this week include; Laura Remington, Brian Drozdowski, Peter Wright and Steve Murphy