Expect Bank Deregulation to Take Place in Small Pieces of Legislation

As lawmakers begin to make moves on promised bank deregulation, Fitch Ratings is of the opinion that this will more likely take the form of many small bills targeting specific segments of the financial sector instead of an overarching piece of legislation.

“Broad and deep deregulation is generally viewed by Fitch as likely to have a negative impact from a bank credit risk perspective; however, the ultimate form of regulatory change and its application by individual banks will determine the ratings implication,” wrote Fitch analysts in a new report.

For instance, if the Volcker Rule is repealed, it’s still unlikely that banks will return to full-scale proprietary trading, yet it may lead to negative ratings implications that depend on banks’ response, Fitch analysts said. If the Orderly Liquidation Authority (OLA)—the Title II provision of the Dodd-Frank legislation that gives the Federal Deposit Insurance Corporation (FDIC) powers to carry out quick liquidations of large, complex financial companies—is taken away, it could open up the banking sector to “…significant systemic risk in the event of a crisis, though resolution planning could be a mitigating factor to large bank failures,” Fitch said.

Meanwhile, replacing the Consumer Financial Protection Bureau (CFPB) is not expected to directly affect most banks’ and nonfinancial institutions’ credit profiles, “…though they could reduce the regulatory burden and associated costs,” analysts said.

– Nicholas Stern, senior editor

Moody’s Downgrades China’s Rating

With the expectation that economy-wide debt will continue to rise and potential growth will slow, credit ratings agency Moody’s Investors Service downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3. The country’s outlook has been changed from negative to stable. This marks China’s first downgrade from Moody’s since 1989.

Though Moody’s expects that reforms will likely improve the economy and financial system given time, the financial strength of the country will deteriorate in coming years. Reforms are not likely to prevent a rise in economy-wide debt nor help with increasing government liabilities. Risks are balanced, however, at the A1 rating level, and as reforms take hold, the deterioration in China’s credit profile will be contained, Moody’s said.

Explaining the decision, Moody’s said that China’s GDP will remain very large and growth will stay high, but potential growth will likely decrease in coming years. Given the importance Chinese authorities place on growth, the economy may become increasingly reliant on policy stimulus. GDP growth has declined in recent years from a high of 10.6% in 2010 to 6.7% in 2016, a slowdown from structural adjustment that Moody’s expects to continue. Further, the ratings agency forecasts that economy-wide debt of the government, households and nonfinancial corporates will continue to rise.

China’s Ministry of Finance criticized Moody’s decision, saying that it was based on "inappropriate methodology" and has somewhat exaggerated the difficulties the Chinese economy is facing, China Daily reported.

The downgrade comes on the heels of a bilateral trade agreement between the U.S. and China that was revealed on May 12, part of which allowed foreign-owned financial groups to offer credit ratings services by July 16, the Financial Times reported.  Investors believe that the introduction of credit rating services will help attract foreign investment into China’s onshore bond market. Fitch Ratings said that it was encouraged by the news and looked forward to more details, and Moody’s and Standard and Poor’s made similar statements, the Financial Times said.

Moody’s also downgraded the ratings of 26 Chinese nonfinancial corporate and infrastructure government-related issuers and rated subsidiaries, as well as a number of banks.

– Adam Fusco, associate editor

Eastern European Companies Prefer Noncredit Sales

Overdue business-to-business (B2B) invoices in Eastern Europe are on the decline, while sales on credit terms rose slightly. Despite this, nearly 60% of companies prefer not to use credit on B2B sales. Payment default risk is also expected to worsen in the region, according to a survey from Atradius.

Overdue B2B invoices increased roughly 5% in 2016, but a more than 1% drop this year brought it to 41.5%. Nearly nine out of 10 responses reported late payments from domestic B2B customers. Foreign customers’ late payments decreased slightly but still impacted about eight in 10 responses. The Czech Republic was most likely to experience late payments while Hungary was the least likely. Turkey was the most affected and saw days sales outstanding (DSO) numbers at an average of 73 days. The regional average DSO was 61 days.

As far as sales on credit terms, the average percent of B2B sales to domestic customers is higher than that of foreign customers. This has been seen before in previous surveys. Poland had the lowest average percent of credit sales at just below 30%. Hungary had the most sales on credit terms with about two out of every three transactions. Roughly 40% of Eastern European companies sold on credit terms, which was just ahead of Western Europe.

Payment terms also increased from 2016 to 2017 in Eastern Europe. Of the countries surveyed, respondents averaged 35 days this year compared to 31 last year. Turkey had the largest increase to 47 days, and it had the longest invoice-to-cash turnaround at 42 days.

Liquidity and insufficient funds were the issues most often cited for payment delays. Complexity of payment procedures was also a reason for B2B payment concerns. “According to responses across the countries surveyed, 45% of the average total value of domestic B2B invoices remained unpaid after the due date,” said Atradius analysts.

“Against this backdrop, a strong focus on the management of trade credit risk is essential to maintaining the financial viability of a business,” said Andreas Tesch, Atradius chief market officer, in a news release. The Atradius Payment Practices Barometer survey included more than 1,000 companies from the Czech Republic, Hungary, Poland, Slovakia and Turkey.

– Michael Miller, editorial associate

Eurozone Growth Maintains Six-Year High

Economic growth in the eurozone, already at a six-year high, held steady in May, while job creation rose to one of its strongest recorded levels, according to the latest IHS Markit Flash Eurozone Purchasing Managers’ Index (PMI). Business optimism about the coming year is at one of the highest levels in the five-year history of the survey’s future output question.

“The consensus forecast of 0.4% second quarter growth could well prove overly pessimistic if the PMI holds its elevated level in June,” said IHS Markit Chief Business Economist Chris Williamson. “Capacity is being strained by the strength of demand, with backlogs of work showing one of the largest increases in the past six years.”

With output growth accelerating to the fastest in over six years, manufacturing has led the upturn, with service sector business activity also remaining strong. A boost for manufacturing came from exports rising at the steepest rate since April 2011. To expand operating capacity, hiring has been heavy, at a pace rarely before seen, IHS Markit said. Manufacturing added jobs at the steepest rate in the survey’s 20-year history. The overall rise in employment was the second-largest in nearly 10 years.

Strong price pressures have dogged the upturn, with average selling prices for goods and services rising at the second-fastest rate since July 2011.

“Although selling prices have continued to march higher, there are signs of input cost pressures beginning to ease,” Williamson said. “This suggests underlying inflationary forces could moderate as we move into the second half of the year, playing into the ECB’s [European Central Bank] hands. Although the pace of economic growth signaled by the PMI is historically consistent with the ECB taking a hawkish stance, the dip in cost pressures will add weight to arguments that there’s no rush to taper policy.”

– Adam Fusco, associate editor

Foreign Currency Shortages Continue to Hit Oil Exporters in Sub-Saharan Africa

Even though oil prices have stabilized recently, oil exporters in Sub-Saharan Africa will continue to have a difficult time managing foreign currency shortages racked up in recent years.

"Falling oil and commodity prices over the past two years have led to foreign currency shortages in numerous Sub-Saharan African countries, with oil exporters hit particularly hard," said Lucie Villa, a Moody's vice president, senior analyst and co-author of a recent report. "The stabilization in oil and commodity prices over recent months will help to ease the pressure, but any recovery will depend on continued higher prices and could take some time."

In Angola and Nigeria during the past six months or so, governments have tried to shore up the fall in foreign exchange reserves by rationing dollars, devaluing currencies and borrowing in foreign currencies, Moody’s said. “But this has been to the detriment of the non-oil economy, price stability and government balance sheets,” analysts with the ratings agency said.

The Republic of Congo and Gabon peg local currency to the euro and foreign exchange reserves have collapsed, with reserves expected to fall more this year, Moody’s said.

Nonfinancial companies operating in oil exporting countries like Nigeria and Angola have seen the most impact from local currency weakness, and analysts expect these problems to continue this year but ease in 2018. "Dollar shortages make it difficult to pay suppliers of imported goods and equipment, meet dollar debt payments or to repatriate funds outside of the respective countries," said Dion Bate, a Moody's vice president. "The associated local currency weakness increases the cost of servicing unhedged foreign currency debt obligations, reduces repatriated profits in foreign currency and lowers operating margins, as companies are not able to pass on high import costs to the consumer."

Banks in Angola, Nigeria and the Democratic Republic of the Congo have been the most affected by foreign currency shortages because of their economies’ reliance on dollars, as they’ve seen foreign currency deposits deplete with limited access to new foreign funding. "The resultant currency devaluations have also eroded banks' loan quality, profitability and capital," said Constantinos Kypreos, a Moody's senior vice president.

Higher oil prices and associated revenues are relieving pressures in Nigeria and Angola central banks, which are injecting more dollars into the economy, Moody’s said. Regardless, banks in Sub-Saharan Africa typically keep high capital buffers and enjoy robust profitability.

– Nicholas Stern, senior editor

Conference Board Index Continues Solid Showing

There may be growing doubts as to the staying power of the current economic recovery in some circles, but the data that has come from the Conference Board of late has been very solid. For the fourth straight month, there was an improvement in this data. Now the index is sitting at 126.9, 0.3% higher than it was the month before.

The index is one of the more comprehensive looks at the U.S. economy as it is essentially an index of indices with 10 components added together to paint a whole picture. There is an examination of factors such as initial claims for jobless benefits to track whether companies are hiring or firing, factory orders to get a feel for the demand that is presenting itself from the consumer, the performance of the S&P 500 to gauge what is happening in the markets and so on.

The other seven indicators include the average number of hours worked in manufacturing, manufacturer’s new orders in consumer goods and materials, the ISM index reading of new orders, nondefense capital goods orders, building permits for new private housing units, the Leading Credit Index, the interest rate spread between 10-year Treasury bonds and federal funds rate and the measure of consumer expectations for business conditions. There were reported improvements as far as the lagging indicators and the coincident index as well.

The assertion at the start of the year was that the economic growth we have seen was being driven by expectations. That has been true to some degree as there have been plenty of surveys and polls suggesting that the enthusiasm demonstrated by the business community and the consumer was rooted in the belief that a new regime would sweep through and accomplish everything from tax reform to deregulation to revamping health care and reworking trade. It soon became apparent that none of these moves would be simple or swift. That was expected to drag on people’s confidence. It may have to a degree, but there have been other factors that have helped people stay upbeat.

The economy relies on the consumer for some 80% of its growth. For several reasons, the consumer is in a good mood and has started to extend that mood to action. For a few months at the start of the year, the surveys were not really matching up well with reality. Consumers said they were confident, but retail sales lagged. Now those retail numbers are up. Revisions to the old data show that there was more activity in the retail sector than had been noted before. There is even evidence that older Millennials are starting to emulate their elders as they begin their families and buy homes and all the other things that having children demand.

-Chris Kuehl, Ph.D., NACM Economist

Risk Grows Among Chinese Investment Companies

Chinese investment companies (ICs) have come to the fore internationally, with rapid expansion over the last five years due to loose monetary policy and government support for overseas expansion of local companies. But that rapid growth may not have been matched with corresponding risk management, according to a recent report from Fitch Ratings.

Overseas expansion has become important in the strategies of ICs, which have acquired an advantage in making foreign acquisitions, with targeted businesses tempted by access to the Chinese market and other opportunities afforded by IC portfolios. From 30% to 40% of the total assets of ICs are bound up in overseas investments, Fitch estimates. Foreign acquisitions have even become necessary for portfolio diversification, but such expansion is also in accord with the government’s “going out” policy that encourages companies to invest and operate abroad.

The government has recently sought to curb capital outflows and check foreign direct investment, but ICs keep foreign currency offshore and have expanded access to offshore capital markets, which can help in foreign acquisitions without increasing capital outflows, the ratings agency said.

Concern lies in the fact that the ICs’ strategies and risk controls have not been tested by market volatility or an economic downturn. These companies also have less-sophisticated tools for reporting risk compared to more developed countries. The fact that ICs have been able to meet performance targets is attributed by Fitch to favorable market conditions. A reliance on divestment proceeds and bank loans to meet cash outflows creates the risk that ICs could be pushed into a “fire sale” environment if there is stress in liquidity, Fitch said.

Chinese IC assets enjoyed a compound annual growth rate of 67% in five years to the end of 2016, reaching a value of $1.5 trillion. Fitch expects assets to rise by more than 25% each year over the next five years.

– Adam Fusco, associate editor

U.K. Insolvencies Expected to Drop this Year, but Underlying Conditions Still Cloudy

Insolvencies in the U.K. are expected to decline by 7% this year, but a new report from credit insurer Atradius suggests the drop is not due to any underlying economic resilience but a statistical adjustment from the high rate of insolvencies in personal service companies (PSCs) in 2016.

In 2016, the U.K. Insolvency Service noted a 15% year-over-year increase in compulsory liquidations and creditors’ voluntary liquidations in England, while cases in Wales grew to 14,810, Atradius analysts said. The bulk of this increase was due to changes to claimable expenses rules that led to the liquidation of almost 1,800 PSCs in the fourth quarter of 2016. Without these PSC liquidations, the insolvency rate dropped to 1% year-over-year.

This year, the overall insolvency rate is thus expected to drop by 7% as these types of liquidations become less prevalent, Atradius said. However, business insolvencies in industries like retail are expected to increase due to the uncertainty surrounding Brexit. Retail sales, year-over-year, are expected to decrease to 1.2% growth in 2017, compared to 2.6% in 2016. Overall GDP growth is also expected to fall to 1.6% this year, compared to 2.0% in 2016.

Meanwhile, an April small- and medium-size enterprise (SME) Risk Index from Zurich found 52% of Britain’s SMEs are owed an estimated $57.8 billion in late payments. The index, which culled the results of over 1,000 SME owners, found 21% are owed more than $32,000 and almost 10% are owed more than $129,000.

Nearly two-thirds of those who recorded late payments typically saw delays of more than a month on payments already 30 days overdue, while 45% saw payment delays of up to three months, Zurich said. Twenty-four percent of survey respondents said late payments had caused their businesses to overdraft in the past, while 39% said late payments have had a significant impact on cash flow.

– Nicholas Stern, senior editor

Sovereign Credit Risk on the Decline

Though the politics of individual countries may continue to be in flux, sovereign credit risk appears to be on the decline, at least as measured during the week ending May 12.

The European Sovereign Expected Default Frequency (EDF), which measures the expected probability of default over a five-year time period by Moody’s Investors Service, dropped by an average of 2.44% on the heels of the European Commission’s (EC) report that economic growth in the eurozone is expected to expand 1.7% in 2017, a fractional increase from the forecast in February. According to Moody’s, the EC said that the perceived risk to the outlook has lessened due to the defeat of populist parties in France and the Netherlands.

“At the start of the year, the most pronounced threat to the future of the European Union was coming from countries that were once considered stalwarts,” said NACM Economist Chris Kuehl, Ph.D. “The British decision to withdraw was not all that unexpected given the frosty relationship the U.K. has long maintained with the rest of Europe, but the prospect of both the Netherlands and France pulling out had many declaring that the EU was a ‘dead man walking.’ As it turned out, both Geert Wilders and Marine Le Pen fell short and the EU was saved. At least that has been the general assessment from a relieved establishment in western Europe.”

Greece showed the largest improvement in the eurozone, with its Sovereign EDF declining from 3.08% to 2.82%, indicating that investors have some faith in the country’s ability to secure bailout money.

The Asia Pacific region’s Sovereign EDF declined by 0.51%, with South Korea’s decreasing from 0.18% to 0.17% as Moon Jae-in’s swearing in as president may ease political tensions with promises of relieving economic worries, improved relations with North Korea, and more balanced diplomacy with the U.S. and China, Moody’s said.

Latin America recorded the largest weekly drop in default probabilities, with Venezuela, Brazil and Chile marking notable improvements. In the Middle East and Africa region, Saudi Arabia, Nigeria and Turkey contributed to an average rise of 1.19% for the area’s Sovereign EDF.

– Adam Fusco, associate editor

House Builder Confidence Soars in May

Builder confidence in the market for newly-built single-family homes continued to grow in May to the second-highest level since the Great Recession, as tracked by the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

The HMI reached a score of 70, up two points from the April HMI reading, NAHB said. “The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market,” said NAHB Chief Economist Robert Dietz. “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”

The HMI tracks builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor”; readings over 50 indicate more builders see conditions as good than poor.

Within the components of the HMI, sales expectations over the next six months rose four points to 79, NAHB said. The index gauging current sales expectations climbed two points to 76. The buyer traffic index, on the other hand, fell a point to 51.

Three of the four regions tracked over three-month moving averages in the HMI saw gains. The Midwest remained unchanged.

“This report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, TX.

– Nicholas Stern, senior editor

Retail Sales Inch Up in April after Upward Revision from March

Retail sales inched up modestly but below estimates in April, boosted in part by a strong showing in non-store retailers, while retail sales figures were revised upward for March, according to an analysis of data from the U.S. Department of Commerce by Wells Fargo.

For non-store retailers, sales grew by 1.4% in April, while sales at electronics and appliance stores increased by 1.3%. “Electronics and appliance store sales has been one of the weakest sectors of retail in the past year but has been very strong lately, increasing another 2.2% in February,” Wells analysts said. Motor vehicle sales also reversed weak postings in the first quarter by increasing 0.7% in April.

Housing retail sales were mixed in April, with building materials and garden equipment and supplies dealer sales increasing 1.2% on the back of a 1.7% drop in March. On the other hand, furniture and home furniture store sales dropped 0.5% in April following a 1.5% increase the prior month.

Clothing and clothing accessories store sales dropped 0.5% in April following a bump in March. Also, general merchandise store sales carried on a decline from the prior month. Department store sales were down, year-over-year, by 3.7% in April, though they eked out a 0.2% rise on the month.

Meanwhile, retailers appeared to be stocking up on inventory in March—by 0.2% overall—in anticipation of some growth during the second quarter, Wells said in a separate report. “One of the few advantages brick-and-mortar retailers have over online competitors is having product when the consumer needs it ‘now!’” wrote Tim Quinlan, senior economist, and Sarah House, economist, both with Wells Fargo. “That may be a factor in why retailers are stocking up more than wholesalers and manufacturers.”

– Nicholas Stern, senior editor

Import, Export Prices Continue to Rise

Higher fuel prices and nonfuel prices each contributed to an increase in the price index for U.S. imports in April, according to the U.S. Bureau of Labor Statistics (BLS). Export prices also rose and have not recorded a monthly decline since last August. The last time import prices declined was last November.

U.S. import prices rose 4.1% for the year ended in April, continuing a trend of 12-month increases over 4%, the largest over-the-year advances for the index since February 2012. Petroleum prices saw a rise of 1.6% and natural gas 4% in April. Over the past year, the price index for import fuel has advanced nearly 43% in contrast to about a 32% decline for the previous 12-month period ending April 2016. Between April 2016 and April 2017, petroleum prices rose nearly 44% and natural gas 49%. Rising prices for nonfuel industrial supplies and materials; automotive vehicles; foods, feeds and beverages; and consumer goods offset lower capital goods prices for the year, BLS said.

Higher prices for both agricultural and nonagricultural exports contributed to the overall increase in export prices. Over the past 12 months, U.S. export prices rose 3% following a decline of 5.1% for the year ending April 2016. Among agricultural exports, a nearly 38% jump in vegetable prices this April more than offset falling prices in soybeans, corn and wheat, reflecting the largest monthly advance since the index began in December 1996. The price index for nonagricultural exports increased almost 3% over the past 12 months. In April, higher prices for capital goods and automotive vehicles offset price drops for industrial supplies and materials.

Improved global demand has continued to benefit exporters, with a stable dollar allowing further export price increases, according to a recent Wells Fargo report. An increase in export prices in March reflected the strongest year-over-year rate since 2012, Wells Fargo said.

– Adam Fusco, associate editor

Riskier Infrastructure-Like Transactions Likely to Increase

There will be an increased investment movement in riskier infrastructure-like transactions similar to 2007–08, said a new Fitch Ratings release. Credit professionals need to be on the lookout for such deals in nontraditional infrastructure investments. “Life insurers, fund managers and pension funds are increasing their allocations to infrastructure transactions as they seek out stable returns from real assets,” the report said.

“Non-core infrastructure” transactions are “likely to be fundamentally riskier than traditional infrastructure deals … because the underlying asset may be less essential to the public, may not have the same high barriers to entry and may experience more variable costs,” said Fitch.

Some of these “hybrid infrastructure” transactions include airport services and landing slots. “So far, investors have focused on buying and refinancing existing assets,” the ratings agency said, but “these investors are more aligned with debt investors in looking at the long-term stability of a business and thus keeping leverage within manageable levels.”

Private hospitals and care home businesses 10 years ago were structured in similar ways as the new infrastructure-like transactions. Other assets such as telecom towers were also once considered outsiders, but according to Fitch, some market participants now consider them as “core infrastructure” assets. This could change the current course of infrastructure hybrids and eventually land them in the same “core infrastructure” category.

– Michael Miller, editorial associate

Small Business Optimism Dips Slightly, with Dampened Expectations for an Improving Economy

Small businesses remained relatively optimistic overall about the economy in April, though they expressed some unease in their expectations for improvement in the economy following an unsuccessful attempt to repeal and replace the Affordable Care Act.

The National Federation of Independent Business’ (NFIB) Small Business Optimism Index dipped 0.2% in April to 104.5, dragged down in part by an eight-point fall in improvement expectations. Still, most of the factors tracked in the NFIB index remained on solid footing, including sales trends and increasing employment, according to an analysis of the data by Wells Fargo.

Owners continue to report difficulty in filling skilled or qualified labor, and the percentage of owners who rank the situation as their most important problem is nearing a cycle high not seen since November 2000, Wells Fargo analysts said.

Meanwhile, according to the latest Job Openings and Labor Turnover (JOLTS) survey that was released today, job openings rose a bit in March with 5.7 million openings. Job openings rose by 126,000 positions, while mining and logging lost 8,000 slots following recent gains.

Involuntary separations remain low as employers seem to be trying to hold on to workers in a tight labor market, Wells Fargo said. The so-called quit rate stayed the same at 2.1% in March, where it’s been hovering for the past year. “Although this marks an improvement from earlier in the cycle, wages have disappointingly failed to accelerate thus far in 2017. With a 17-year high share of small businesses reporting jobs are hard to fill, an acceleration in quits would bode well for a pickup in wage growth later this year,” analysts said.

– Nicholas Stern, senior editor

Problems in U.K. Retail to Impact Real Estate-Related Credit Risk

Following the break of the United Kingdom with the European Union, retailers in Britain have been affected by changes in consumer confidence and the increase of sourcing costs due to the depreciation of the pound. The U.K. nonfood retail industry faces profitability challenges, which will impact the use of real estate in the industry, with a subsequent effect on the credit risk of loans secured by it, according to a new report from Moody’s. The secondary retail property sector is set to be particularly exposed to risks, though logistics and prime retail commercial properties are likely in a position to mitigate them.

“Reduced store productivity and profitability for U.K. nonfood retailers can lead to reduced rents and increasing vacancies in properties securing commercial real estate loans and commercial mortgage-backed securities,” said Stephen Hughes, assistant vice president and analyst at Moody’s. “The degree to which these retail challenges will affect real estate landlords and debt differs, however, between prime logistics, prime retail and secondary retail assets.”

The logistics sector has the benefit of higher occupational demand. “Well-located, high-quality logistics properties will continue to attract strong tenant demand, due to steady growth in online retailing,” said Oliver Schmitt, vice president and senior credit officer at Moody’s. London’s premier shopping streets also benefit from high tenant demand, reducing credit risk affecting loans secured by these assets.

With the continued shift from consumers toward online retailing and other factors, rising cost pressure will continue to weigh on secondary retailers, who already suffer from declining sales productivity.

“The effect of rising costs on store profitability is more pronounced in secondary than in prime retail spots in the U.K., where steady or increasing sales productivity is a buffer against cost increases,” Schmitt said.

Retailers also endure higher expenses from rising employee costs and increased property taxes, particularly in London, Moody’s said.

– Adam Fusco, associate editor

Labor Productivity Affects Global Growth

Labor productivity is a cause of concern for the global growth outlook, according to a new report from Moody’s Investors Service. The ratings agency expects global growth to increase to 3.1% this year and 3.5% next year. Global growth was at 2.7% in 2016. This could change if productivity growth does not keep pace.

“Should productivity growth remain at its 2016 pace of 1.2% or even at its average pace of 1.7% over 2011–2015, global growth in 2018 could be as low as 2.5% or 3% respectively, compared to Moody’s current expectation of 3.5%,” the agency said.

There are several reasons behind the slowing rebound rate after the financial crisis, including weak investments due to the availability of credit, business pessimism and economic uncertainty. “Long-term trends such as population aging and the slowing growth in human capital and education are also behind the decline in productivity growth,” Moody’s said.

Meanwhile, the U.S. Bureau of Labor Statistics released the country’s productivity data this week. Labor productivity in the U.S. decreased at a 0.6% annual rate in the first quarter of 2017. Economists polled by Reuters expected no change in productivity. Productivity increased 1.1% between the first quarter of 2016 and that of 2017. “Weak productivity could make it difficult to boost annual economic growth to 4% as President Donald Trump has promised,” said Reuters.

“It should be noted that productivity numbers are always volatile and were likely affected by the seasonal issues that dragged overall GDP growth down for the quarter,” said NACM Economist Chris Kuehl, Ph.D. “The problem is that productivity has been unimpressive for years now and has consistently been under the levels seen in 2011.”

– Michael Miller, editorial associate

Canada Increases Exports to Non-U.S. Countries

Canada is looking to other places besides the United States when it comes to shipping goods abroad. Coal exports to China and South Korea were among the reasons for the new record of goods sent to countries other than the U.S., according to Statistics Canada.

The new record is roughly $9.2 billion, and “exports to countries other than the United States rose 15.3%” in March, the agency said in a news release. Total exports rose 3.8% in March to a record of $34.2 billion. Imports from non-U.S. countries also increased slightly to $12.2 billion. Overall imports increased 1.7%.

The U.S. is still by far the No. 1 trade partner for Canada, yet total exports only increased a tenth of a percent from February to March. Meanwhile, U.S. imports increased 2% in March and by only 4.2% on a year-over-year basis. Other importers such as China, Mexico, the U.K. and Japan had double-digit increases from March 2016 to March 2017.

Forestry products and building and packaging materials exports jumped 5% in March, but that could change following the United States’ recent announcement of adding a tariff to softwood lumber imports into the U.S. Also on Thursday, the U.S. Bureau of Economic Analysis announced a $20 million increase in March lumber imports.

Canada’s trade deficit hit roughly $100 million, while economists polled by Reuters expected a shortfall of about $580 million. Royal Bank of Canada was less favorable, with an expected deficit of nearly $730 million.

– Michael Miller, editorial associate

Global Growth Forging Slowly Ahead, but Variety of Risks Could Upend Stability

A year’s worth of slow but steady growth in the world’s industry sectors as tracked by Moody’s Investors Service has led the ratings agency to view overall outlooks for the sectors in a positive, if “modest and fragile,” light.

Global industry sector outlooks reflect expectations for fundamental business conditions over the coming year to year and a half; at the end of the second quarter 2017, nine sectors’ outlooks were positive, six were negative and 39 were stable.

"The current distribution pattern of industry sector outlooks reflects a low-growth global economy that isn't particularly resilient to shocks," said Moody's Senior Vice President Bill Wolfe. "While we expect median cash flow to accelerate slightly over the next year, the global economy also faces growing uncertainty from potential geopolitical event risks."

Moody’s now sees global median EBITDA growth at 4.0%, after three years of growth from 3.0% to 3.5%, Wolfe said. Advanced and developing economies are progressing and commodity prices are stabilizing. However, “…unusual monetary conditions continue, with interest rates rising in the U.S. and quantitative easing and negative interest rates persisting in Europe and other advanced economies.”

Trade is increasing slowly as well, though weak global demand, protectionism and political risks in the U.S. and Europe could hamper greater growth, Moody’s said. Other potential risks to global growth include evolving technologies that could disrupt established industries, shifting U.S. trade policy, a quick rise in U.S. interest rates or suddenly strengthening dollar, a quick downturn in China and economic fragmentation in Europe.

– Nicholas Stern, senior editor

Puerto Rico Faces Lawsuits, Title III Restructuring from Debt Crisis

Bondholders filed to sue the Commonwealth of Puerto Rico on Tuesday after a year-long moratorium on lawsuits expired at midnight on Monday. This could lead to the initiation of a bankruptcy-like procedure for the Caribbean island to restructure its $70 billion debt.

According to the Associated Press, those who bought $16 billion worth of bonds backed by Puerto Rico’s sales tax said in the lawsuit that a plan by the government to cut its debt was unconstitutional. The suit comes as the administration of Gov. Ricardo Rosselo failed to negotiate a deal with bondholders after the May 1 deadline. Puerto Rico Chief of Staff William Villafane said his government prefers to reach an agreement with bondholders, but if negotiations fail, a bankruptcy-like process could be an option, the Associated Press said.

The debt-cutting process, known as Title III, is an in-court procedure that the country may be forced into. Beyond its debt, Puerto Rico has a 45% poverty rate and near-insolvent public health and pension systems, according to Reuters.

The lawsuit, filed in federal court in San Juan, accuses the government of impairing contractual rights of so-called COFINA bondholders, the debt for which is backed by sales tax revenues, and violating the due process clause of the U.S. Constitution. The expiration of the litigation freeze is expected to open the floodgates of others seeking to sue the Puerto Rican government in an attempt to block Rosselo’s plan to impose drastic repayment cuts, Reuters said.

The island is operating under a federal oversight board that has the ability to seek creditor losses through Title III, according to Bloomberg. The restructuring would be the largest in the $3.8 trillion municipal bond market. With the moratorium lifted, Puerto Rico may face adverse rulings on cases already filed. The island offered holders of general-obligation bonds as much as 77 cents on the dollar and proposed as much as 58 cents on the dollar for its sales tax debt as of a week ago, but the offer was rejected, Bloomberg said.

– Adam Fusco, associate editor

Defaults Down, Liquidity Flowing for U.S. Spec-Grade Companies

Defaults for U.S. speculative-grade, non-financial companies were down in the first quarter, with default rates hitting their historic average of 4.7%. And with consistent economic growth, recent refinancing activity and improvement in commodities, analysts with Moody’s Investors Service project the default rate will drop to 3.0% in a year.

"The number of U.S. speculative-grade defaults slipped to a two-year low in the first quarter of 2017," said Moody's Senior Vice President John Puchalla. "Recent refunding activity is helping to mitigate the effect of higher interest rates, alongside continued easing of strains in the commodities sector, even as oil and gas defaults remain elevated relative to other sectors."

Ten U.S. non-financial defaults were reported in the first quarter, down from 15 during the prior quarter, which represents the smallest number since the beginning of 2015, Moody’s Puchalla said. Four of the firms that defaulted in the first quarter were in the oil and gas sector, which is well below the 17 companies in the sector that defaulted in second quarter of 2016. Exploration and production companies made up three of the recent defaults. Moody’s predicts that liquidity and ratings trends point to more defaults among oilfield service companies later this year.

Moody’s Liquidity Stress Index (LSI) decreased to 5.3% in March from a six-year high of 10.3% a year prior. Economic growth is providing good cash flow, and a blooming energy recovery and “covenant-lite” loan structures are helping to ease liquidity and default risks for spec-grade companies in the U.S. Still, the energy LSI remains high at 12.9%.

"A large number of low-rated companies are managing to get by with weak balance sheets because their liquidity is keeping them afloat," Puchalla said. "While we expect economic growth to quicken in the next year, a risky speculative-grade borrower rating distribution will sow the seeds for more defaults if economic growth is unexpectedly weak, geopolitical issues disrupt trade flows or accessing the capital markets becomes more difficult."

– Nicholas Stern, senior editor

Road Open for Transportation Growth

Though changes in trade and fiscal policies are on the horizon, healthy growth is expected in the U.S. transportation sector, according to Fitch Ratings’ U.S. Transportation Trends special report.

Leading the way for overall growth in airport passenger traffic are international hub airports, with passenger enplanements rising 3.5% in 2016. “Growth in passenger enplanements, however, is and will continue to soften as carriers scale back on service additions,” said Seth Lehman, senior director at Fitch. The ratings agency predicts growth from 2.5% to 3 % in 2017.

Growth in ports is expected to match GDP. Upward movement in the second half of 2016 was led by ports on the West Coast, with 1.8% growth year-over-year, while East Coast ports grew 3.4% in the same time period, though only posted a 0.4% rise last year compared to 2015. “Shifting trade agreements or renegotiated tariffs may affect import/export volumes, though the full effects of these changes will likely extend beyond 2017,” said Director Emma Griffith.

Moderate economic and population growth in the Southeast and Southwest should contribute to high traffic performance for toll roads in those regions. “Toll road revenues are positioned to grow faster than traffic as many authorities implement policies of inflationary toll increases,” said Director Tanya Langman.

Fitch has established a new metric called “Peak Recovery,” outlined in the report, which supplements the ratings agency’s peak-to-trough metric and demonstrates how the 2016 performance for each credit compares to its prerecession peak volume.

– Adam Fusco, associate editor

European Steel Outlook Improves

The steel industry in Europe is rebounding, and producers are expected to have increased profits during the next 12 months, said Moody’s Investors Service. The ratings agency also changed the European steel sector outlook from negative to stable. The change in rating is due to the “expectations for the fundamental business conditions in the industry over the next 12 to 18 months,” Moody’s analysts said.

Steel prices and industrial output in the European Union is expected to improve in the next year, but there could be a slight decline in prices in the “second half of this year because of a retreat in the cost of raw materials and seasonality,” said Hubert Allemani, a senior analyst and vice president with Moody’s. "Steel prices have remained at three-year highs since the strong rebound in the first quarter of 2016, alleviating concerns about how long the recovery would last."

Steel making is expected to be supported by demand from car manufacturers and the construction industry, which is Europe’s largest steel-using sector. Imported steel will still have an effect on European steel makers. “[China has] far too much capacity and will be trying to unload as much as they can on the U.S. and Europe,” said NACM Economist Chris Kuehl, Ph.D. The expected demand growth will be less than 2%, according to Moody’s.

Better prices between steel makers and their clients from a year ago are expected to help results for the first half of this year. “Together with improved consumer confidence, manufacturing in the eurozone has gained momentum and the strengthening of industrial activity should support demand for steel,” Moody’s said.

– Michael Miller, editorial associate

New Jersey Construction Subcontractors: Look Before You Lien!

The U.S. Court of Appeals for the Third Circuit’s recent decision in Linear Electric Company Inc. vs. Cooper Electric Supply Co. and Samson Electrical Supply Co. Inc. significantly increases risk for New Jersey construction subcontractors seeking to collect on claims for materials sold or services provided to construction contractors that file bankruptcy prior to paying for those materials or services.

Generally, under New Jersey’s construction lien law, when a supplier sells materials on credit to a contractor who then incorporates those materials into property located in New Jersey that is owned by a third party, the supplier can file a lien which “attaches” to the owner’s property for the amount the contractor owes the supplier for those materials. The supplier can then directly recover from the property owner on its claim for unpaid supplies—but only in an amount equal to the account receivable owed to the contractor by the owner. In other words, the supplier can collect the debt the owner owes to the contractor to satisfy its own account with the contractor. Given this statutory framework, suppliers selling materials on credit outside the bankruptcy context have a significant added source of recovery, knowing their accounts are secured by construction liens on the property of the owner (who does not want its property subject to liens).

Under bankruptcy law, when a contractor files bankruptcy, there arises an automatic stay which protects the contractor/debtor from any actions by creditors to collect a debt, including the creation or enforcement of liens “against” property of the debtor. Prior to the Third Circuit’s decision in Linear Electric, it was not clear whether the filing of a construction lien under New Jersey’s construction lien law after a contractor filed for bankruptcy constituted a violation of the automatic stay. Since the construction lien “attaches” to the property of the owner—not the property of the contractor—there is a reasonable argument that the filing of the lien would not violate the automatic stay, because such property is not property of the contractor’s estate.

In Linear Electric, however, the Third Circuit, affirming decisions of the Bankruptcy Court and the United States District Court, held just the opposite. The Third Circuit held that the act of perfecting a construction lien after a contractor’s bankruptcy filing violated the automatic stay. The court emphasized that although the liens “attached” to the real property of a non-debtor owner, the recovery by the supplier on account of the construction lien is, as a practical matter, from the accounts receivable owed to the contractor by the owner. The court concluded, therefore, that the lien was “against” property of the contractor (the accounts receivable) and the act of filing the lien violated the automatic stay and was void. In short, the court determined that although a construction lien under New Jersey law attaches to the property of the owner, it is also “against” property of the contractor within the meaning of the Bankruptcy Code. 

The Third Circuit’s decision restricts the ability of suppliers who provide goods or services to projects in New Jersey to secure their accounts with construction liens after their contractor has filed bankruptcy.  On the flip side, it provides contractors who file bankruptcy with the ability to collect accounts receivable owed by the project owner (to the extent the owner does not otherwise have valid defenses) and improves the prospects that the contractor can reorganize its financial affairs. While suppliers could formerly seek solace in the exact argument advanced by the suppliers in Linear Electric, the Third Circuit’s decision confirms that the concept of property of the bankruptcy estate is, indeed, a far-reaching one, providing the utmost protection to the debtor’s estate. In light of this decision, suppliers to construction contractors in New Jersey should consider taking the following steps to reduce their risk:
 
(i) Reduce accounts receivable turnover ratio by adopting more conservative policies on credit extension;

(ii) closely monitor the creditworthiness of contractors to avoid unexpected bankruptcy issues and, particularly, so that a construction lien can be obtained and perfected prior to bankruptcy; and

(iii) if choosing to deal with a contractor whose financial situation is questionable, request adequate assurance of payment for the services or materials provided.

– Paul Kizel, Esq., is a partner and Nicole Fulfree, Esq., is an associate at Lowenstein Sandler LLP’s Bankruptcy, Financial Reorganization & Creditors’ Rights Department. Lowenstein Sandler represents the Official Committee of Unsecured Creditors in the Linear Electric Co. Inc. Chapter 11 case.

Global Outlooks See Strong Indications of Growth

With 20 key economic variables covering 20 major countries, the latest 20/20 Vision chart pack from Fitch Ratings reveals a major trend in the resilience of the recovery in the eurozone. The report plots high-frequency macroeconomic data and includes readings on PMI balances, credit growth and labor market performance.

“The eurozone saw one of the most impressive improvements in PMI balances amongst the advanced countries in the second half of 2016 and recent readings have corroborated this trend,” said Brian Coulton, chief economist at Fitch. “The steady rise in credit growth to the private sector is also suggesting that ECB QE [European Central Bank quantitative easing] may have started to gain some traction on the economy, while a pickup in exports partly reflects the stabilization in emerging markets.”

A key component of the persistent expansion in the area, as indicated in the ratings agency’s March Global Economic Outlook and subsequent data releases, has been improving labor market conditions. Consumer confidence has been helped by ongoing job growth. Nominal wage inflation has enjoyed a small uptick, though still below the ECB’s inflation target, Fitch said.

Data from China has been better than expected, with an increase in industrial production not seen since late 2014. Data is mixed from the United States and United Kingdom, with soft nonfarm payrolls in the U.S. and weakening retail sales growth in the U.K., Fitch said.

Trade is leading the growth seen globally, according to Wells Fargo. The bank’s recent Global Review said that the global economy is on the right path. Though China is not contributing what it once did at the start of this century, its first quarter GDP indicates an economy growing slightly more than market expectation. Strong performance by Chinese trade in March and improvement in international reserves are encouraging signs of global growth, according to Wells Fargo.

Low but positive growth is expected this year in troubled Brazil. The country’s monthly economic activity index in February was the strongest in nearly three years. Data from the U.K. indicates that the economy decelerated in the first quarter of this year, but real GDP growth has held up better than expected since last June’s Brexit referendum, Wells Fargo said.

– Adam Fusco, associate editor

Recovery in Central and Eastern Europe Fueling Local Telecom Earnings Rise

A regional recovery underway in Central and Eastern Europe is boosting household spending and consumer confidence that will allow telecom providers to outpace their Western European counterparts in credit quality and revenue and earnings growth into 2018.

"Strong regional economic recovery is fueling household demand for telecoms services, such as smartphones and mobile data, driving revenue and earnings growth, improving credit quality and attracting M&A interest,” said Alejandro Núñez, vice president and senior analyst at Moody's Investors Service. “The pace of these improvements will eventually slow, but will continue for at least the next 18 months."

The ratings firm anticipates several telecoms in the region will see an average of 3.5% revenue growth this year and next, based on the sector’s being a less-mature market than in Western Europe as regards service penetration, pricing and usage. “CEE telecom markets have had more scope to expand their networks and increase the penetration of new services such as 4G mobile and Internet Protocol television (IPTV) services,” Moody’s analysts said. Prices in Central and Eastern Europe also lag behind those in Western Europe—from 44% in mobile voice revenue per minute to 14% in mobile data.

This growth potential is fueling M&A interest among foreign buyers, particularly in Poland, Moody’s said. “This trend will continue most likely in the form of in-market cable-to-mobile deals or foreign firms acquiring or merging with CEE operators.”

Earnings volatility for the sector is also likely to decrease as many telecom companies in the region have lowered foreign exchange risk over the past year by refinancing euro and U.S. dollar bonds with local-currency-denominated bank loans, analysts said.

– Nicholas Stern, senior editor

Clearing, Settlement Services Highly Vulnerable as Cyberattacks Threaten Financial Institutions

Cyberattacks against financial institutions have become an increasingly important risk factor, and institutions that provide trade execution, clearing and settlement services are more vulnerable to attacks aiming for system disruption because of their interconnectivity with the financial system.

“Cyber risk is a growing threat that can adversely affect credit ratings as attacks can compromise customer data and disrupt websites, with detrimental financial or operational consequences for individual issuers and financial systems,” said Fitch Ratings analysts in a recent report. “Related reputational damage may weaken business and access to funding and capital markets.”

In the U.S., the chair of the Securities and Exchange Commission has said cyber-security poses the biggest risk to the financial system. Under the European Union’s General Data Protection Regulation, which takes effect in May next year, banks can face fines of up to 4% of their global turnover for security breaches; any organization that uses data from EU citizens has to comply with the rule. Fitch sees that some organizations, like The International Organization of Securities Commission’s Committee on Payments and Market Infrastructures, are seeking more coordination at the international level to combat the issue. The European Central Bank reports that the average lag until a breach is detected was 146 days in 2016, a drop from 205 days in 2014.

“As information is shared across firms, cyber risk detection and response plans could improve, but coordination does not ensure that risks can be fully contained,” Fitch notes.

The use of cyberinsurance to mitigate some of the damage from cyberattacks is on the rise, reaching about $1 billion in premiums in 2015 and expected to continue growing, though protection against reputational damage is more difficult to protect against, Fitch says.

– Nicholas Stern, senior editor

SWIFT Addresses Allegations of Service Bureau Hacking

SWIFT, the financial messaging service, has said in a press release that there is no indication that its network or core services have been compromised amid allegations that two services bureaus may have been targeted to gain unauthorized access to bank customers’ data.

As reported by Reuters, a hacking group calling itself the Shadow Brokers recently released allegations that service bureaus in the Middle East and Latin America may have been compromised by third parties. The allegations date back several years. Service bureaus are third-party providers that operate a connection to SWIFT for firms that wish to outsource their day-to-day operation of the SWIFT connection. In its release, SWIFT said that it is in close contact with the service bureaus in question to ensure that they are implementing appropriate preventive measures.

SWIFT recommends that customers pay close attention to their own security and keep in mind security issues when choosing a service bureau or other third-party provider. The effects of any vulnerabilities can be mitigated by immediately installing security updates and patches. SWIFT is working through its Customer Security Programme to provide tools and guidance about security to its customers and will keep customers updated through its Security Notification Service.

SWIFT said that there has been no impact on its infrastructure or data and that there is no evidence to suggest that unauthorized access has occurred to its network or messaging services.

Service bureaus must register under SWIFT’s Shared Infrastructure Programme (SIP), which outlines the legal, financial and operational requirements with which services bureaus must comply. The SIP should not be considered a substitute for customers to perform their own security checks and due diligence, the messaging service noted.

– Adam Fusco, associate editor

Small Fabricators and Manufacturers Optimistic about Future in New Survey

Many small- to medium-size job shops surveyed for the latest Fabricators and Manufacturers Association’s Forming and Fabricating Job Shop Consumption Report have an optimistic outlook lately and believe some significant impediments to business progress may be removed and that some of the stimulating efforts will bear fruit.

A whopping 61.9% of those surveyed see improving conditions for the coming quarter and another 34.3% expect things to be about as they are now. Only 3.7% expect things to get worse. This is the most confident the sector has been in a while.

Still, the survey found capacity utilization is on the low side, just short of 70%, which indicates slack in the system, though when looking at the anticipated capacity, there is a general sense that companies will be adding to it. That may mean more slack in the short term, but should mean less in the way of shortages and bottlenecks later. But generally, the survey respondents are staying connected to their capital equipment strategies as 57.4% indicate that nothing has altered their plans and they intend to buy what they had intended to buy. About 18% have delayed their original plans by a quarter or two and 24.6% have set their plans on the back burner indefinitely. There is tremendous variability between sectors, however. Those feeding into the agricultural community are seeing very low demand while medical manufacturing thrives. Automotive and aerospace are not as vibrant as they have been.

In the manufacturing community, the level of real confidence is reflected in data such as new orders. The survey this month shows that 44.7% of the respondents are reporting more in the way of new orders and another 41% are reporting that this activity has been stable. Only a little over 14% of the responses indicated a decline in new orders. That suggests that there is more expansion in the manufacturing sector overall and that it is expected to expand further into the year.

Hiring has also seen progress and stability, but there are some factors to take into consideration that affect these numbers and have for some time. The survey reports that over 27% expect to do additional hiring while just over 68% are staying right where they are as far as hiring is concerned. That means that only 4.5% of the respondents plan to reduce their workforce. This is as low a level as has been seen in the last few years. The wrinkle in all this is that most of the manufacturers are struggling to find qualified people to hire. The pipeline as far as talent is empty. Companies really have no alternative but to poach one another’s employees, which generally means that labor costs will rise steadily as companies try to lure the people they want and need.

Beyond hiring, the next biggest expense is raw material costs. Here, the key factors are generally the price of steel and aluminum. The survey reports that the vast majority of respondents see prices for both metals coming up. In general, the commodities suppliers have been trying to adjust to reduced demand over the last few years—they have limited output as a means to hike prices. The tactic has worked pretty well and the hope is that more production can be spurred when and if there is a boost in overall demand.

The cost of transportation and logistics has also been a factor when it comes to overall expenses, but there hasn’t been all that much movement. The percentage of respondents that report more logistics costs is 29.3% and most have indicated that these costs have been stable—over 70%. Not one respondent reported that these costs are going down. Rail costs have been more stable than trucking costs and there has been some reduction in the costs of ocean cargo due to the overcapacity issue facing maritime shipping. There is also a great deal of regionalism in logistics, in part due to the fluctuating costs of fuel and overall operating expenses. Just as with manufacturing, there has been a shortage of manpower in transportation. It is estimated trucking companies are short some 80,000 drivers this year alone.

– Chris Kuehl, Ph.D., NACM economist

Leveraged U.S. Corporates May Face Challenges from Rising Rates

Rising interest rates may translate into downside risk for some U.S. corporate sectors. The credit profiles of U.S. corporates are generally insulated from rising rates, but lower-rated issuers are more vulnerable, according to a new report from Fitch Ratings.

The ratings agency does not see significant interest rate risk across speculative-grade credit profiles, even in a severe stress scenario, but a rising rate environment may limit the margin of error available to corporates that are undergoing material acquisition or in the midst of adjusting their business models. This is particularly true for those that are highly leveraged. Poor execution of cost-saving programs and key initiatives, for example, may hamper a cash flow profile that is already weak if coupled with rising rates. Negative rating actions may result.

The retail sector, with high floating-rate debt exposure, is vulnerable to interest rate risk if the benefits of a growing economy are offset by secular challenges, Fitch said. Diversified manufacturing, which likewise has high floating-rate exposure, could see improved demand, though external factors such as an increase in trade restrictions could weigh on costs and hamper growth. Sectors with low floating-rate exposure like telecom face their own challenges from a competitive environment.

The stable outlook for U.S. corporates for this year supports the view that rates rise in response to increasing inflation during an economic recovery, Fitch said. Since companies have been proactively managing maturity profiles, modest rate increases, without an increase in spreads, would not impact interest rate expense in the near term. Investment-grade corporates are less vulnerable to rising rates. Fitch estimates that its portfolio of speculative-grade corporates has an average of 52% of floating-rate debt compared to 15% for investment grade.

– Adam Fusco, associate editor

China’s GDP Climbs in First Quarter with Strong Housing, Construction Sectors

Chinese GDP for the first quarter beat economists’ consensus forecast, buoyed by the nation’s secondary industry comprised of mining, manufacturing, construction and utilities production.
GDP in China grew 6.9% in the first quarter of the year, continuing a slight upward trend over the last three quarters, according to an analysis by Wells Fargo’s Jay Bryson, global economist, and E. Harry Pershing, economic analyst.

The country’s secondary industry climbed 6.4% year-over-year, following 6.1% the prior quarter, and accounts for about 40% of the value added in the Chinese economy, the analysts said. The nation’s primary industry, including the agriculture, forestry and fishing sectors, slowed to 3.0% in the first quarter from 3.3% the prior quarter. Growth in China’s service sector also decreased slightly to 7.7% from 7.8% the prior quarter.

“Strength in the secondary sector can partially be attributed to a rebound in overall investment spending, which increased 9.2% in March—its highest year-over-year rate of growth since May of last year,” the analysts said. Meanwhile, investment in the Chinese housing sector has similarly grown—by 8.9% in February. “The turnaround in housing investment has seemed to provide a boost to the construction sector, which is contained in the secondary industry. Although we do not expect housing investment growth rates to return to the 30% rates we witnessed during 2010–2011, continued government support for lending should buoy investment in the sector and for the foreseeable future.”

Also, China’s foreign exchange reserve woes, which saw reserves decline from nearly $4 trillion in mid-2014 to about $3 trillion today, have eased somewhat after modest increases in February and March, Wells said.

– Nicholas Stern, senior editor

Asian High-Yield Bond Issuance More than Doubles in Q1 2017

Asian high-yield bond issuance is at its highest level in four years. This has paved the way for “stronger liquidity profiles and manageable levels of refinancing risk,” according to Moody’s Investors Service. The first quarter of 2017 was more than double the last quarter of 2016, said the ratings agency.

There were 26 deals totaling $10 billion during the first quarter of this year, which is the highest level of issuance since the first quarter of 2013, when it was at more than $12 billion, said Annalisa DiChiara, a Moody's vice president and senior credit officer, in a news release. This was “driven by investor tolerance for lower credit quality and active refinancing by issuers," she added.

Refinancing risk will stay at a manageable level, “and the market is well positioned to absorb upcoming maturities which total [$127 billion] in rated and unrated bonds from now through to 2021," DiChiara said. The fourth quarter 2016 issuance was at $4.5 billion, and “50% of the [$10 billion] issued in Q1 2017 was rated at B3—a record amount of issuance at this level,” said the release.

The Asian nonfinancial high-yield corporate default rate will also stay low, according to Moody’s, at around 3% this year, while “most Asian high-yield corporates currently show good or adequate liquidity.”As of the last day of March, Moody’s covered 123 Asian companies in its high-yield portfolio with nearly $67 billion of rated debt outstanding.

The March Asian Liquidity Stress Index was at its lowest since September 2015, but the long-term average of the index shows “the ongoing weakness in liquidity for many issuers in Asia,” said Moody’s.

– Michael Miller, editorial associate

U.S. AAA Rating Affirmed by Fitch

With its financing flexibility and its prominence as having the most liquid capital markets in the world, the United States has earned an affirmation of its AAA rating and stable outlook from Fitch Ratings.

According to Fitch, the U.S. economy is one of the most productive and dynamic and is supported by strong institutions and a favorable business climate. The U.S. is the issuer of the world’s preeminent reserve currency, which accounts for nearly two-thirds of global reserves.

Uncertainty remains, however, over the short-term fiscal and borrowing outlook, but Fitch expects tax cuts to lead to a loosening in fiscal policy. The U.S. government debt burden is a relative credit weakness in comparison to other AAA-rated sovereigns, Fitch said. A tax reform proposal may lead to an increase in deficits over a 10-year time span, though the plan would aim at boosting investment and growth. Tax cuts are not likely to lead to a lasting boost in growth, however, Fitch believes.

The ratings agency has revised its real GDP growth forecast for the U.S. to 2.3% for next year and 2.6% for 2018. Trade protectionism and checks on immigration would be negative for growth in the medium term. Fitch expects the Federal Reserve to continue to raise interest rates, with two more 25 basis point increases in 2017 and four in 2018, with no major effects on credit growth.

Fitch does not anticipate any developments that would lead to a downgrade in the stable outlook for the United States. Developments that may lead to negative rating action, however, include 1) a significant increase in government deficits and the debt-to-GDP ratio, and 2) a deterioration in the credibility of economy policy or a shock that affects the U.S. dollar’s role as the foremost global currency.

– Adam Fusco, associate editor

New Chinese Bond-Tightening Rules Should Ease System Risks

A recent announcement by Chinese regulators to tighten the rules surrounding the use of corporate bonds as collateral should help reduce systemic risks, but it is also a credit negative for onshore issuers and borrowers. The rule changes effectively reduce the pool of bonds eligible to serve as collateral for repurchase agreements or repos, which should curb the growth in system-wide leverage that the rapid development of the repo market has helped engender, according to a new Moody’s Investors Service report.

“The new rules are aimed at controlling leverage in China's financial markets and should therefore reduce systemic risks,” said Nino Siu, a Moody's vice president and senior analyst. “And, by restricting the use of collateral to high-quality bonds, the new rules reduce the likelihood that defaults on lower-rated bonds could bring about a rapid contraction in the supply of credit, in the event that they cause lenders to reassess the risks of collateralized lending.”

On April 7, the China Securities Depository and Clearing Corporation Limited (CSDC) announced that, starting April 8, only newly issued corporate bonds with onshore issuer ratings/bond ratings of AA/AAA, AA+/AAA and AAA/AAA can be used as collateral in a repurchase agreement. Bonds issued or announced with a prospectus on or before April 7 are not affected by the new rules.

This change should enhance the regulation of the credit risks in the repo market that has more than doubled since March 2015 to about $3.25 billion by the end of this March, analysts said. About 34% of all corporate bonds in the onshore exchange-traded market in China are AAA-rated by onshore rating agencies. That means borrowing on the remaining lower-tier bonds available in the onshore market will become more difficult. Also, more borrowers tend to look for non-AAA-rated bonds at the short end of the duration curve. “The loss of repo eligibility for non-AAA-rated bonds will therefore boost the liquidity premium of such corporate bonds and result in a wider yield differentiation between AAA and non-AAA-rated bonds, raising funding costs for lower-rated issuers,” Moody’s said.

– Nicholas Stern, senior editor

Small Business Owners Remain Optimistic

A surge in small business optimism that started last November was continued in March, according to the National Federation of Independent Business’ (NFIB) Small Business Optimism Index. Though the index slipped slightly, it still posted a strong reading, with gains in actual earnings, capital expenditure plans and job-creation plans. Sales expectations, however, dropped eight points, signaling that the index could be moderating.

“Small business owners remain optimistic about the future of the economy and the direction of consumer confidence,” said NFIB President and CEO Juanita Duggan. “We are encouraged by signs that optimism is translating into economic activity, such as capital investment and job creation.”

The Uncertainty Index, which is a subset of data on how small business owners foresee the near term, saw a significant increase, the NFIB said. It reached its second-highest reading in the survey’s history in March. Most of the March data was collected before Congress failed to pass a bill repealing and replacing the Affordable Care Act, NFIB noted, adding that the optimism of the past five months was in part due to small business owners’ expectations of a reversal in some government policies. Duggan said that the index’s April data, due in May, will better indicate how owners are processing events in Washington.

“By historical standards, this is an excellent performance, with most of the components of the index holding their gains,” said NFIB Chief Economist Bill Dunkelberg. “The increases in capital expenditure plans and actual earnings are signs of a healthier economy, and we expect job creation to pick up in future months.”

Small business owners are having a hard time satisfactorily filling open positions, however, which will be a headwind to job growth, the NFIB said. The reports correlate with hard data on a tightening labor market and a gradual pickup in wage growth, Wells Fargo noted.

– Adam Fusco, associate editor

Supreme Court Summarily Vacates Fifth Circuit Decision Upholding Texas Surcharge Prohibition

On March 29, 2017, the United States Supreme Court issued its long-awaited decision in Expressions Hair Design, et al. v. Schneiderman, holding that New York’s prohibition against surcharging credit card transactions is a regulation of commercial speech and remanding the case to the Second Circuit Court of Appeals for further consideration as such.

On Monday, April 3, 2017, the Supreme Court ruled on petitions for certiorari in the two other surcharge-related cases that were pending before it.

In Rowell, et al. v. Pettijohn, a group of merchants sought review of a decision by the Fifth Circuit Court of Appeals, which, like the Second Circuit in Expressions, held in early 2016 that the Texas surcharge ban is a constitutionally permissible regulation of pricing.  On Monday, the Supreme Court granted the merchants’ petition, summarily (i.e., immediately and with no further briefing or argument by the parties) vacated the Fifth Circuit’s decision and remanded the case back to the Fifth Circuit for further consideration in light of the Supreme Court’s holding in Expressions.

In Bondi v. Dana’s Railroad Supply, et al., the Florida attorney general sought review of a decision by the Eleventh Circuit Court of Appeals, which held in late 2015 that Florida’s surcharge ban is a facially unconstitutional regulation of merchants’ speech.  The Supreme Court denied the state’s petition for a writ of certiorari, leaving the Eleventh Circuit’s ruling intact.  As a result, the Florida surcharge ban has effectively been overturned in its entirety.

Denial of certiorari in Dana’s means the Supreme Court will not have an opportunity to provide further guidance on the application of the commercial speech doctrine to credit card surcharge bans unless and until another case—possibly even Expressions or Rowell, depending upon the outcome in those cases on remand—comes up from the courts of appeals.  However, the Dana’s decision at least suggests that the Supreme Court is receptive to the Eleventh Circuit’s reasoning, and is a knockout punch for Florida merchants, whose surcharging fight is now over unless and until the Florida legislature decides to craft a new surcharge ban.

– Bruce Nathan, Esq., and Andrew Behlmann, Esq., of Lowenstein Sandler LLP

U.S. Unemployment at Its Lowest in 10 Years

The U.S. unemployment rate is at its lowest figure in nearly 10 years. The rate dropped to 4.5% in March from 4.7% in February, according to the latest release from the Bureau of Labor Statistics (BLS). The unemployment rate is also the lowest it has been since May 2007, when it was at 4.4%. The rate has been under 5% for 11 months straight. On a year-over-year basis, the unemployment rate was down half a percentage point.

Total nonfarm employment increased by 98,000 jobs in March after increasing by 435,000 jobs in January and February. There were an additional 6,000 construction jobs in March compared to 59,000 new jobs in February. This was the lowest increase in construction jobs in seven months, according to the Associated Press. This is likely in part to the warmer-than-normal weather in February across the country.

“Employment in construction has been trending up since late last summer, largely among specialty trade contractors and in residential building,” BLS said. Meanwhile, manufacturing and wholesale trade were among the other major industries with little or no change in March. Construction unemployment was down to 8.4% last month compared to 8.7% a year ago, and the number of unemployed workers was down 4,000.

As much as better-than-usual weather in February is to be credited for job gains, less-than-favorable weather was a factor for the swing and miss on growth in March. It was expected the economy would add 180,000 jobs with an unchanged unemployment rate, according to economists polled by Reuters. Economists surveyed by Bloomberg also expected an increase of 180,000 jobs.

– Michael Miller, editorial associate

Fitch’s Retail Loan Default Rate Climbs

Fitch Ratings has increased its U.S. retail trailing 12-month (TTM) loan default rate on the back of Payless ShoeSource’s bankruptcy filing on April 4. The ratings agency expects the rate to go much higher from continued challenges in the retail sector.

The loan default rate fell to 0% in March after reaching a level of 0.5% in February. Fitch expects the rate to hit 9% over the next 12 months, equaling about $6 billion in defaults, due to increased discounter and online penetration as well as a shift in consumer spending toward services and experiences. The vicissitudes of brand popularity are also a factor in the competitive retail environment that has seen negative cash flow, tight liquidity and unsustainable capital structures, according to Fitch.

Payless was on Fitch’s Loans of Concern list. Eight other retailers on the list with a significant risk of default include Sears Holding Corp., Gymboree Corp., Nine West Holdings Inc. and rue21 Inc.

Payless’ Chapter 11 filing was intended to facilitate a balance sheet debt restructuring and operational overhaul. It intends to emerge as a smaller concern. Liquidation sales are planned for 400 out of 4,400 underperforming stores that are pegged for permanent closure. To reduce debt by 50%, the company has entered a plan support agreement with parties that hold about two-thirds of its first-lien and second-lien debt.

– Adam Fusco, associate editor

Credit Quality for Public Firms Grew in March, but Watch for Longer-Term Default Risks

Overall corporate credit quality improved in March as the Kamakura Corporation’s troubled company index decreased from the prior month. The troubled company index was at 8.15% in March and at the 81st percentile of historical credit quality (with 100 being the best of all time) from January 1990 to the present.

The index reflects the percentage of the Kamakura 38,000 public firm universe that has a default probability over 1.00%. A rising index indicates declining credit quality and vice versa. The percentage of the firms tracked by the index with default probabilities between 1% and 5% decreased in March, as did the percentage of firms with default probabilities between 5% and 10% and those with default probabilities over 20%. Those companies with default probabilities between 10% and 20% were mostly flat for the month. Overall volatility in the numbers was low as well.

Trade creditors should continue to watch for signs of distress coming from troubled retailers, as the two tracked American defaults in March were discount retailers Gordman’s and HHGregg, Kamakura said. During March, there were 18 overall defaults tracked in the index, with four from Brazil, three from Russia and two each from Australia, Great Britain and the U.S. Among the 10 riskiest rated firms, five were from the U.S., two from Great Britain and one each from France, Greece and Spain. Walter Investment Management Group was the riskiest rated firm with a one-year default probability of 15.02%, up 6.54% from the prior month.

Over the longer term, Kamakura analysis shows default rates dramatically expanding on the five- to seven-year time horizon, even for blue-chip firms. This expansion is particularly significant given new issuance of high-grade debt in the five- to seven-year window both in 2016 and 2017, said Martin Zorn, president and COO for Kamakura Corporation. Kamakura’s anticipated 10-year cumulative default rate among 2,577 rated firms is 13.44%, higher than the 13.33% rate expected in September 2008 when Lehman failed.

“One of the risk management lessons learned during my tenure at the Winston-Salem-based Wachovia was that excellent credit management was earned through portfolio management and the early identification of problems,” Zorn said. “The term structure of default is a critical tool in the early identification of potential future problems.”

– Nicholas Stern, senior editor

Kamakura Chairman and CEO Donald R. van Deventer, Ph. D., will speak about using big data and computer power to supplement careful credit analysis at NACM’s 121st annual Credit Congress & Expo in Dallas, TX, June 11-14.

Moody’s Database Reveals Insights into Corporate Debt Structure

Analysis of data from a database of debt instruments from Moody’s Investors Service may yield helpful insights ahead of the next economic downturn. The data reveals how default types change over time, how recoveries differ depending on the instrument’s position in a company’s debt structure and whether private-equity ownership influences recovery rates.

Moody’s Ultimate Recovery Database traces close to 5,500 debt instruments from more than 1,100 defaulted U.S. companies whose total liabilities recently exceeded $1 trillion, the ratings agency said in a new report. The database spans the years from 1987 to the end of 2016 and includes U.S. nonfinancial corporate borrowers, both rated and unrated by Moody’s, that had more than $50 million in debt at the time of default.

“Our database includes information gathered during the 2008–2009 recession and shows that it featured a higher percentage of distressed exchanges than did previous downturns,” said Moody’s Vice President David Keisman. “Distressed exchanges accounted for about 15% of defaults between 1987 and 2007, but that figure has since risen to almost 50%.”

The data reinforces the importance of a debt instrument’s position in a company’s capital structure and the amount of debt cushion beneath it, with a positive correlation between debt cushion and ultimate recovery rates, Moody’s said.

“Recoveries are also influenced by current default rates, but industry rarely matters,” said Moody’s Associate Analyst Julia Chursin. “Losses are exacerbated during default peaks and are less pronounced during more benign credit cycles. On the other hand, there is relatively little variation in firm-wide recovery rates among industries, and so no observable relationship between the recovery rates of asset-heavy and asset-light industries.”

Private-equity ownership affects the type of default and the recoveries on certain kinds of debt, but has little influence on firm-wide recovery rates. Higher losses for junior creditors result from the prevalence of distressed exchanges, prepacks and bank debt in the liability structures of private-equity defaulters, Moody’s said.

– Adam Fusco, editorial associate

Construction Spending at Nearly 11-Year High

Construction spending is on the rise according to the latest monthly release from the U.S. Census Bureau. February’s seasonally adjusted rate was at $1.19 trillion, up nearly 1% from the revised January estimate of $1.18 trillion. Construction spending is at its highest level since April 2006 after it had declined the previous two months. A spending rebound of 1.1% was expected, said economists polled by Reuters.

The data is collected through surveys in all 50 states and Washington, D.C. They gather information on four construction types: privately owned nonresidential construction, state and local construction, privately owned multifamily, and federal construction projects. It estimates the cost of labor and materials and contractor’s profits, among other items.

On a year-over-year basis for February and the first two months of 2017, total construction spending was up 3%. The latter works out to be a positive difference of nearly $5 billion. Meanwhile, private construction saw a spending increase of 0.8%, or about a $7 billion increase from January. Public construction spending saw a smaller rise of $1.6 billion in February. Educational and highway construction also increased from January to February.

Total private construction jumped nearly 7% from February 2016 to February 2017 while total public construction spending dropped 8% over the same time period. Residential construction spending moved upward more than 6%, but nonresidential spending only increased 1%. A main reason for the small increase was due to a nearly 30% drop in sewage and waste disposal spending and an almost 20% dip in conservation and development spending over the year time frame.

Within total public construction, power spending slipped more than 36% from February 2016 and over 11% from January 2017. Total nonresidential lodging, office and commercial spending each saw major breakthroughs from February 2016 despite little or no change from January 2017.

“The construction sector hasn't been on fire but continues to post passable numbers, and momentum may begin to build at least for the housing sector as permits for both single- and multifamily units are on the climb,” according to Econoday. “Construction spending is a good indicator for the economy’s momentum,” said the economic website.

Warmer weather in February helped construction start earlier this year, but late winter weather could cause a fallback in March, said Wells Fargo. Data for March will be released by the Census Bureau on May 1.

– Michael Miller, editorial associate

Sunnier Skies May Be in the Offing for Brazil

Though it has yet to emerge from a recession that is now two years in the running, Brazil’s economy might be set to enter positive territory this year, with both private consumption and investment driving growth.

It’s doubtful that the rebound in production will be vigorous, however. According to a report from Euler Hermes, investment has plunged by over 10% and has been the worst-performing component in 2016. Imports have contracted and private and public consumption have decreased. But the fall in GDP has moderated, and indicators for confidence and production that dropped heavily last year are now evening out.

A quick fall in consumer prices enabled Brazil’s Central Bank to cut its key policy interest rate for the first time in four years. More cuts are expected throughout this year to prompt growth in the economy.

Businesses and households have accumulated debt below that of other emerging economies. Public debt continued to rally and escalated to about 74% of GDP compared to an average of 47.5% of GDP for emerging economies. Brazil is allowed to hold this level of indebtedness because it is a one of the best in regards to reserve adequacy, the credit insurer said.

Some domestic banks and local governments in the country may see some negative effects from the “Carne Fraca” (Weak Meat) investigation into corrupt practices in Brazil’s protein industry, according to Fitch Ratings. Long-term risks from the investigation are expected to be limited as long the investigation does not spread from those plants already implicated. If the meat sector were to undergo a wider risk scenario, public sector banks would likely be more exposed, the ratings agency said.

– Adam Fusco, associate editor

Supreme Court Determines New York Credit Card Surcharge Ban Regulates Speech

On March 29, the United States Supreme Court issued its ruling in Expressions Hair Design et al. v. Schneiderman, in which a group of retailers challenged New York’s prohibition on credit card surcharges. The challenged New York statute, N.Y. General Business Law § 518, provides that “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means.”

Prior to 2013, Visa and MasterCard rules mostly prohibited U.S. merchants from imposing surcharges for credit card payments, rendering the New York statute essentially redundant. However, as a result of a massive 2013 antitrust settlement (which was recently overturned by the Second Circuit Court of Appeals and is in the process of being re-engineered), Visa and MasterCard amended their rules to permit merchants to surcharge credit card payments, bringing the New York statute and similar laws in a handful of other states back into the news—and in several instances, into court.

The Expressions plaintiffs sought to enjoin the New York Attorney General from enforcing § 518 against them, arguing that the statute violates the First Amendment by regulating how they can communicate prices to their customers. Rather than raising prices across the board and offering a discount for cash payments, the retailers wanted the ability to maintain and post their usual, single prices, but charge an additional fee for credit card payments to properly reflect the added costs imposed by the credit card networks.

The merchants prevailed in the United States District Court for the Southern District of New York, which held that § 518 is unconstitutional because, among other infirmities, the statute impermissibly regulates merchants’ speech by drawing an arbitrary distinction between the words “discount” (which was permissible) and “surcharge” (which was forbidden) even though the economic underpinnings of both are essentially the same.

The Second Circuit Court of Appeals reversed the District Court, holding that § 518 is not unconstitutional because it is simply a pricing regulation and because it is “far from clear” that § 518 prohibits dual pricing (i.e., separate prices for cash and credit, as opposed to a single price plus a surcharge for a particular mode of payment). The Supreme Court granted certiorari to review the Second Circuit’s decision.

In the Supreme Court, the merchants waived a facial challenge to the overall constitutionality of § 518, and instead challenged the statute only as it has been applied to them in one particular pricing scenario: posting a single cash price and an additional credit card surcharge (either as a percentage of the price or a fixed amount). For instance, a particular retailer might post the price of a particular item at $9.99 but also disclose that it imposes a 3% surcharge for credit card payments. The Supreme Court agreed with the Second Circuit’s determination that § 518 would bar this type of pricing arrangement. However, the Supreme Court disagreed with the Second Circuit’s holding that § 518 is simply a pricing regulation, holding instead that § 518 regulates speech because it regulates “the communication of prices rather than prices themselves” (emphasis added). Accordingly, the Supreme Court remanded the case to the Second Circuit to consider § 518 instead in the same context the District Court previously did—as a regulation of commercial speech and thereby determine the constitutionality of the surcharge ban as applied to this pricing arrangement.

It is likely, given the Supreme Court’s directive to consider § 518 as a speech regulation, that the Second Circuit will reverse its prior course on remand and will instead uphold the District Court’s determination that § 518 is unconstitutional, at least as applied to the “single price” pricing arrangement described above. The takeaway for merchants accepting credit cards from customers located in New York (debates regarding the applicability of § 518 to business-to-business transactions aside) is that, pending the Second Circuit’s ruling on remand, it is very likely § 518 will no longer prohibit the posting of a single price and the imposition of a surcharge atop that price for payment by credit card.

– Bruce Nathan, Esq., and Andrew Behlmann, Esq., Lowenstein Sandler LLP

Flagging Enthusiasm Could Show Up in Otherwise Strong March Credit Managers’ Index

Flagging Enthusiasm Could Show Up in Otherwise Strong March Credit Managers’ Index
The business outlook from credit managers appears to have stepped back a bit from February’s outstanding showing, according to preliminary data in NACM’s latest Credit Managers’ Index (CMI), which will be released Friday morning at nacm.org.

Expect a slight dip in March’s combined CMI score brought on by questions surrounding an anticipated boom economy. Preliminary CMI data shows trade creditors saw slumping sales and new credit applications, but one should look to weigh these drops against readings from a year ago to get a better sense of the ongoing strength in the favorable categories, NACM Economist Chris Kuehl, Ph.D., said. Also look for a turnabout in recent trends of improving favorable category readings and declining unfavorable numbers.

Rejections of credit applications is another category that looks to show signs of improvement in March and could be significant considering a lower level of applications, he said. Parallels between dollar amount beyond terms and dollar collections readings could foretell some areas for concern going forward. Still, “…it is encouraging to note…” that a couple of unfavorable categories, including accounts placed for collection, look close to reaching a 50 level reading, Kuehl said.

– Nicholas Stern, senior editor

For a complete breakdown of the manufacturing and service sector data and graphics, view the March 2017 report on Friday morning by clicking here. CMI archives may also be viewed on NACM’s website.

Eurozone Sees Best Economic Growth in Nearly Six Years

Economic growth in the 19-country bloc known as the eurozone is at a nearly six-year high, according to IHS Markit. The Markit Eurozone Purchasing Managers’ Index (PMI) increased from 56 in February to 56.7 in March, putting the rating at a 71-month high, dating back to April 2011. The first-quarter average was also the highest since the same quarter in 2011.

The PMI survey is based on information from approximately 5,000 companies. The data includes output and input prices, employment and new orders, all of which saw increases.

Manufacturing input costs and selling prices were at their steepest rates since 2011. Economic growth in Germany was second to only France among the European Union (EU) countries using the euro. Manufacturing jobs in Germany increased at its best rate since summer 2011.

IHS Markit Chief Business Economist Chris Williamson said the monetary union saw its best employment growth in nearly 10 years. The entire area saw its largest monthly employment growth since July 2007. Meanwhile, the Associated Press reported the area’s unemployment rate hovered around 10%. Williamson added the business mood in Europe is positive, even with the forthcoming elections. The PMI also signified a first-quarter GDP growth of 0.6%.

Despite positive growth, EU expansion is not likely, according to NACM Economist Chris Kuehl. He said this is due to immigration and financial concerns surrounding new applicants such as Turkey. Six countries, including Greece, Spain and Italy, have talked about withdrawing. The United Kingdom is in the process of leaving the EU after last summer’s referendum. Nearly half of the 28 European Union members have joined in the last 13 years.

– Michael Miller, editorial associate

China’s Steel Companies May Weaken This Year while Exports Should Shrink

Chinese steel companies are set to weaken this year after realizing gains in 2016, mostly due to weakening domestic demand thanks to excess capacity and inventory buildup last year.

"These factors will together depress steel prices, which have reached a four-year high, while elevated raw material prices and reduced exports will also weigh on the earnings of producers," Jiming Zou, a Moody's vice president and senior analyst, said in a recent report.

Moody’s believes China’s steel exports will decline this year by a high single-digit percentage amount on top of 2016’s decrease of 3.6%. “The decline will be driven by increased trade barriers outside China and a narrowing price gap between the domestic and international markets, which makes exports less attractive,” ratings agency analysts said.

Meanwhile, China’s government has set a goal of reducing steel production by 50 million tons this year, which should help relieve some of the pressure on steel prices and earnings. Fallout from this reduction, when combined with China’s efforts to improve state-owned companies’ efficiencies and productivity, could lead to larger firms buying up smaller ones in the sector.

– Nicholas Stern, senior editor

New Equipment Leasing and Finance Sector Business Volume Down in February, Following 2016 Pattern

New business volume in the equipment leasing and finance sector was down 5% to $5.9 billion in February from the prior month.

Business volume fell 3% year-over-year, according to the Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index, which reports economic activity from 25 companies representing a cross section of the sector. Cumulative new business volume in February was up 0.5%, year to date.

“New business volume during the first couple of months of 2017 continues the sluggish growth pattern that began 2016,” Ralph Petta, ELFA president and CEO, said in a statement. “This slow start belies the business-friendly environment that many business and economic commentators point to in characterizing the new administration in Washington. Credit quality is mixed as well.”

Those surveyed in the index reported receivables over 30 days were 1.50% in February, down from 1.7% the prior month and up 1.40% from a year prior, the ELFA said. Charge-offs were 0.38% in February, down from 0.43% the prior month and up from 0.37%, year-over-year. Total credit approvals were at 74.8% in February, down from 75.4% in January.

Meanwhile, the Equipment Leasing and Finance Monthly Confidence Index (MCI-EFI) for March is 71.1, down from 72.2 in February, but still among the highest readings in the past two years.

“There are indicators of a coming manufacturing renaissance and a plan to reduce federal taxes and regulation,” said Miles Herman, president and COO of LEAF Commercial Capital Inc. “But will all this translate into legislation to justify the postelection optimism? If promised legislative changes come to pass, it’s likely we’ll see that optimism become action.”

– Nicholas Stern, senior editor

Corporate Bond Issuance in China Expected to Make a Comeback

Refinancing needs and plans for infrastructure spending will contribute to the recovery of bond issuance by Chinese corporates through the rest of this year, though market conditions will remain tighter than last year and some companies will face restrictions, Fitch Ratings said in a recent report.

A tightening in the bond market in late 2016 made issuance less attractive, with renminbi bonds by Chinese nonfinancial corporates falling by about two-thirds in the period from December to February, compared with the previous year. Tighter rules on some companies, introduced by authorities to address overcapacity and contain risks from leverage, were also a check on issuance. Fitch does not expect a further tightening of conditions. Highly rated firms are likely to turn back to the bond market rather than going to banks for their borrowing.

Refinancing needs among corporates is high, with bonds worth CHY4.3 trillion maturing in 2017, which is about half of the total issued in 2016. Debt financing will be required for expected infrastructure fixed-asset investment, Fitch said.

– Adam Fusco, associate editor