Retail Sales Rise Most in 4 Years

From Bloomberg:

U.S. retailers’ sales are growing at the fastest pace in four years, a sign consumers may be overcoming concern about unemployment and depressed home values.

Sales probably expanded at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said in advance of its June report tomorrow. Nordstrom Inc. and Kohl’s Corp. are among chains that will report June sales increases at stores open at least a year, according to analysts’ estimates.

Retailers may have bucked last month’s drop in consumer confidence that threatens to temper the rebound. The year-to- date growth in sales shows that spending, a key driver of the U.S. economy, is faring better than many investors are betting, said Michael Niemira, the New York-based ICSC’s chief economist.

“The sales results have been uneven, which makes people worry about the recovery,” Niemira said in a telephone interview. “If you look at the underlying growth rate, it suggests a relatively healthy, moderate pace of spending for the remainder of the year.”

Consider this news with the following charts from the St. Louis Fed.

As stated in the above story excerpt, real retail sales have been uneven. However, the general trend is upward.

A larger data set -- personal consumption expenditures or PCEs -- have clearly been in an uptrend for the last year.

Market Sentiment: a Big, Fat, Hanging Fastball

- by New Deal democrat

Back in 2006 and 2007, when Bonddad used to hang out at a big political blog, I would poke (lighthearted) fun at a few of his posts with something called the "Bonddad Put." The Bonddad Put came into play when the market had sold off 3% or 4% or some other horrendous figure in one day after a downward draft. People would think it was The Big One, and inevitably he would write a top-rated diary entitled something like "A Special Note from Bonddad about the Market."

After a couple of those, I noticed that they were almost perfect markers for a bottom in market sentiment. The Bonddad Put meant it was a sure thing that the market would trade higher for the next 30-45 days -- and it worked! By the time The Big One actually hit in September-October 2008, plunges were common enough that Bonddad no longer inevitably wrote those posts, and so the Bonddad Put never came into play.

Something like that old Put looks like it is in play now. Last Saturday's Barron's weekly financial magazine revealed that investor sentiment is very bearish, with the AAII Index showing bullish sentiiment down to 24.7%, and bearish sentiment at 42.0%. The Market Vane Index similarly showed bullish sentiment down to 40%.

Although I haven't been able to locate it online at the Barron's data page, if you check mutual fund cash flows, you will see that retail investors redeemed about $25 billion worth of equity fund shares in June.

While pundits were growing ever more negative, with calls for 1000 on the DJIA (Prechter), or a pundit tells CNBC that a classic 1930s head and shoulders pattern is repeating -- more on that below), and retail investors were selling out, here's what corporate insiders have been doing:

A note of caution: this is a short-term indicator. When The Big One hit in 2008, corporate insiders were caught as flat-footed as most other people. Here's the same graph as above, culled from a post I wrote over a year ago:

The blue line is my addition, noting how low the ratio of insider transactions had to go for there to be a short-term bottom. Note also that there were several of these in the few months just before The Big One -- so following insider trading would not have kept you out when it hit, unless you sold 30 days after the Put was triggered. For what it's worth, I suspect insiders are more savvy now about deflationary signs of economic downdrafts than they were in 2008.

Now here is the icing on the cake. Where did I read about the CNBC prediction of a Great Depression like head and shoulders formation? At Digby's Hullabaloo, an exclusively political left-wing blog. Now, I happen to agree with Digby about 95% of the time on political matters, but taking investment advice from her is like taking advice from the proverbial shoe-shine boy. Now, who do you think is more likely to be right in their market timing? If bearishness is so pervasive, and expectations of a market move based on a technical indicator so universally known, that investment novices who are political writers warn you about what to expect in the market ....

Of course, the usual caveats apply. I'm not offering investment advice, and I care a lot more about how the market reflects on the real economy than about short term trading. But to me, the odds are that the market is offering up one of those rare low hanging fastballs over the center of the plate .

Shorter version: it looks like we are a lot closer to a bottom than a top.

Harbingers of the Second Half Stall

- by New Deal democrat

Besides posting here, Bonddad and I not infrequently have phone conversations about the markets and economy (I know, you're shocked). Over the weekend, I noted that almost all of the data started to head south at precisely the same time -- late April. Commodities, stocks, bond yields (more on that below), mortgage applications, the index of leading economic indicators, YoY CPI -- all appeared to stall or began to decline at almost the exact same time.

In fact, here is a graph I posted at the time of ECRI's leading index, which had been on a tear for a year (following their gutsy and correct call that the Great Recession would bottom last summer). As of mid-April, it had slowed from white hot to red hot -- still showing better growth ahead than at any time since 1983:

And yet, 45 days later it had crashed into negative territory:


Unless we are to believe that we will have blazing growth for the next few months and then hit a wall, an index that plummets that fast in 45 days has a problem. Of course, I should qualify that by noting that the we did actually have non-census job growth in both May and June, and real income has been increasing, as has industrial production. So the coincident incidators are still going up. It is really all of the short leading indicators (I include real retail sales in that group) that seemed to simultaneiously roll over.

Because we are living in the first deflationary environment in 70 years, we have no idea how most data series perform. There is monthly data from the Roaring Twenties and the Depression Era in a few areas: commodity prices, bond yields, and money supply for example; but the rest was kept on an annual basis if it was collected at all, which is not much help for forecasting or policy analysis. Back when I looked at that data almost two years ago, I did find some trustworthy indicators, but they were frequently coincident or just slightly leading (mainly money supply). I also found comparing YoY commodity vs. consumer changes in prices of some help.

In any event, here are the series I found that rolled over before April, and so are worthy of watching more.

1. The Shanghai stock index.

As Bonddad reiterated yesterday, China now unequivocally leads. It is the global locomotive -- and American consumers are the caboose. As with the US in the late 19th and early 20th Centuries, China is a vast bellows, ultimately blowing hot and cold upon the world's resources. It's stock market now appears to lead the rest. Here is the Shanghai stock index for the last 3 years compared with the S&P 500:

There is simply no question that during that time, Shanghai has been the leader. And it is not comforting that it has not turned back up.

2. Bond yield correlation with stock prices

During the disinflationary 1980s and 1990s, bond yields and stock prices moved in opposite directions. That changed beginning in 1998, and generally speaking, continues now. Bond yields and stock prices have generally moved in the same direction, signalling the pre-eminence of DEflation as a concern. During the 2003-2007 expansion, within that range they did move as mirror images, however. They resumed moving in lockstep shortly before the December 2007 downturn, before resuming mirror image movements in the latter part of 2009.

Beginning last December, the stock market and bond yields again resumed moving in the same direction:


This began at the time of the Dubai sovereign default scare, as bond traders worried (or salivated) over who would be next, and began to focus on Greece. Once again, deflation had moved to the fore. By the way, here is how the same graph looked in late 2007 and 2008:



3. Price growth exceeded wage growth

During the disinflationary/asset bubble period, consumers could either cash out appreciating assets (stocks, housing), or refinance at lower interest rates. No more. Consumers can only spend by building up savings, or if wage growth exceeds inflation. In 2009, wage growth was far in excess of deflation. That changed at the beginning of this year, as mainly due to the price of Oil, YoY inflation again exceeded YoY median wage growth:

Real spending growth in that environment can only happen by tapping savings, and after 2008, that was going to be very limited. This is a modern confirmation of the trend I noted above about commodity prices and consumer inflation from the Roaring Twenties and Great Depression era.

4. Oil prices approached 4% of GDP and 6% of consumer spending.

Back in January, I predicted a second half slowdown due to increased energy prices. It was disconcerting that they had immediately risen past $75/barrel so soon after the turnaround from the deepest global decline since the Great Depression. So long as the economy improved, it seemed sure that Oil prices would continue to increase as well, until they acted as a choke collar on growth. They indeed did so:

They just grazed the 4% threshold of GDP/6% threshold of consumer spending in April. While Oil prices themselves peaked in April along with nearly everything else, it appeared obvious in January that they would trigger a slowdown or reversal sometime this year.

5. Money supply stalled or shrank

This is another area of confirmation of indicators from the Roaring Twenties and Great Depression. After rising briskly for over a year, at the beginning of this year, real M2 began to decline and real M1 stagnated:

The M2 decline was the chief reason for the tailing off of increases in the index of Leading Economic Indicators. Recessions have typically been accompanied by real M2 growth of less than 2.5%, and real M1 declining. We have the first, which may be turning around now. The second has not occurred.

6. Housing permits and purchase mortgage applications

The MBA's index of purchase mortgage applications peaked last November just before the original expiration date of the $8000 home buying credit. Despite the secondary peak in April, it has been generally in decline since:

Similarly, housing permits peaked in December and again in March. Housing permits have been the second biggest source of the tailing off of the advance in the LEI, and most likely the MBA purchase mortgage index has been the primary source of the steep and sudden decline in ECRI's index. Housing is a classic "long" leading indicator, and on an annual basis, did lead the 1929 decline by several years, and bottom in 1933.


That's my list. These 6 items have shown that they bear further watching (and generally I do in my "Weekly Indicators" wrap-up). If anybody knows of anything else, feel free to add it to the list in Comments.

Yesterday's Market

Let's start with the euro. Remember the chain reaction that sent the markets lower: the euro dropped leading to a rise in the dollar. This lowered commodity and stock prices and led to an increase in bonds.


The euro broke though technical resistance at (a), consolidated gains in a downward sloping channel at (b) and has now moved higher. Notice the increase volume on the sell-off which indicates a selling panic. As a result of a rise in he euro


The dollar has dropped in a nearly identical pattern (note the similar a, b and c situations).

As a result of the dollar's drop we've seen some movement in several commodity groups.


Agricultural commodities broke through resistance (a) and rose into a downward sloping consolidation (b).


Industrial metals broke through resistance (a) but have been moving sideways.



Gold has dropped in a big way. Notice how prices have moved lower since moving through point (a).



The long end of the curve (20+ years) remains above highs set over the last year (see points a and b).

ISM Drops, But Still Shows Expansion

From the ISM:

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Worldwide. "The NMI (Non-Manufacturing Index) registered 53.8 percent in June, 1.6 percentage points lower than the 55.4 percent registered in May, indicating continued growth in the non-manufacturing sector, but at a slightly slower rate. The Non-Manufacturing Business Activity Index decreased 3 percentage points to 58.1 percent, reflecting growth for the seventh consecutive month. The New Orders Index decreased 2.7 percentage points to 54.4 percent, and the Employment Index decreased 0.7 percentage point to 49.7 percent, reflecting contraction after one month of growth. The Prices Index decreased 6.8 percentage points to 53.8 percent in June, indicating that prices are still increasing but at a slower rate than in May. According to the NMI, 15 non-manufacturing industries reported growth in June. Respondents' comments are mostly positive about business conditions; however, there is concern about the effect of employment on the economic recovery."

Also note the following:

The 15 industries reporting growth in June based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Information; Mining; Accommodation & Food Services; Transportation & Warehousing; Wholesale Trade; Management of Companies & Support Services; Public Administration; Construction; Utilities; Health Care & Social Assistance; Retail Trade; and Professional, Scientific & Technical Services. The two industries reporting contraction in June are: Other Services and Finance & Insurance.

While the index dropped, it is still printing above 50 indicating an expansion.

Yield Curves and Recessions

A Great piece of research from the Cleveland Fed on yield curves and recessions.

Since last month, the yield curve has dropped slightly, with both long and short rates ticking down. The difference between these rates, the slope of the yield curve, has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last seven recessions (as defined by the NBER). In particular, the yield curve inverted in August 2006, a bit more than a year before the current recession started in December 2007. There have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998.

More generally, a flat curve indicates weak growth, and conversely, a steep curve indicates strong growth. One measure of slope, the spread between ten-year Treasury bonds and three-month Treasury bills, bears out this relation, particularly when real GDP growth is lagged a year to line up growth with the spread that predicts it.

Here is the chart of the yield curve spread and lagged GDP growth:

And here is a chart of the recession probability:

China Sneezes and the US Catches a Cold

The US economy was progressing nicely until (roughly) the end of May. Real PCEs had been increasing for about a year, business investment was picking up, inventories were being restocked and the ISM manufacturing and non-manufacturing indexes were at strong levels.Then things turned from a progressing recovery to the appearance of a significant slowdown very quickly. One of the primary causes of this situation is developments in China -- specifically its interest rate policy as it developed through out the first part of the year.

In late 2009 and early 2010, the PBOC started to curb loan growth and increase interest rates:

China’s “real worry” is asset bubbles as capital flows into an economy awash with money and the nation emerges from the crisis into a “boom time,” central bank adviser Fan Gang said.

Moves by the central bank this year to curb liquidity were “timely and necessary,” Fan told a forum in Beijing today. “Although globally we’re still talking about the crisis, China and some developing countries now are facing another boom time.”

.....

The central bank has this year guided bill yields higher at auctions and ordered lenders to set aside a larger proportion of deposits as reserves. The banking regulator has specified a lower target for credit growth in 2010 and Premier Wen Jiabao has also pledged to counter excessive property-price increases.

This was followed by more lending restrictions in early February:

China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans, a person with knowledge of the matter said.

The China Banking Regulatory Commission warned lenders of the risks associated with “hot money” flowing into the property market, the person said, requesting anonymity because the agency hasn’t published the measures. Mortgage defaults in China are rising, the person said without giving figures.

However, PBOC's concerns didn't end there. In early March the bank stated rising commodity prices were a concern:

The People’s Bank of China is concerned about rising global commodity prices, central bank deputy governor Su Ning said today while attending a parliamentary meeting in Beijing.

This was followed several days later with the following statement:

The People’s Bank of China will keep a moderately loose monetary policy and “reasonably sufficient” liquidity, according to a statement from the central bank distributed before a press briefing in Beijing today.

The bank will promote steady monetary and loan growth while strictly controlling loans for new projects.

However, rising prices were a concern later in March:

Inflation expectations are rising in China, making it more difficult for Premier Wen Jiabao to meet his 3 percent full-year price target and adding to the case for an interest-rate increase.

The number of Chinese households expecting prices to gain in the next three months increased in a quarterly survey conducted in February, the central bank said on its Web site today, citing seasonally adjusted data. It didn’t give numbers.

.....

Chinese officials assessing when to end stimulus measures are balancing asset-bubble and inflation risks against concern that a “double dip” global slump remains possible. The world is counting on China to be an engine of growth as unemployment restrains the recovery in the U.S. and Europe grapples with the Greek debt crisis.

In mid-April, the PBOC stated they were concerned about real estate appreciation, and acted to curb real estate lending:

China’s surging property market is having its “last madness” and speculators can’t fight a government resolute about curbing asset-price inflation, central bank adviser Li Daokui said.

Investors “don’t realize how strong and resolute the political will is among top leaders to curb price gains,” Li said in an interview broadcast by the state-run Central Television yesterday.

Property prices surged 11.7 percent in March from a year earlier, the most since records began in 2005, government data showed this week. The State Council yesterday raised mortgage rates and down-payment ratios for second homes to cool the market and damp inflation expectations as the world’s third- biggest economy accelerates.

However, China's moves to curb real estate speculation may prove insufficient:

China’s third increase of bank reserve ratios this year left benchmark interest rates and the yuan’s peg to the dollar unchanged, risking the need for more concerted effort to contain property prices and inflation in coming months.

The requirement will increase 50 basis points effective May 10, the People’s Bank of China said on its Web site yesterday. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones.

The latest move adds to a government crackdown on property speculation after record price increases in March and came on a holiday weekend, with Chinese markets shut today. Within an hour of the central bank announcement, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.

China is still going to grow -- they're simply trying to do it at a slower pace.

Simply put, China's central bank is looking at a slowdown scenario. As a result, expect anyone that deals with China to slowdown. And that "anyone" category is literally every other country on the planet.

Here is a chart of the FXI and the SPY. Notice how the FXIs have led for the last two years.

Yesterday's Market

Let's start with a look at the equity markets


Since the beginning of the year, the SPYs have formed a head and shoulders pattern. Prices have recently broken the neckline and are now headed lower.


Note the EMA picture is turning more and more negative. Now the 10 and 20 day EMAs have moved below the 200 day EMA and the 50 is about to follow.


Looking closely at the latest downturn, notice the large number of downward candles. From the peak of 113 to today's open is a drop of nearly 9%.


On the 10 day chart notice that prices are in a clear downtrend. However, Prices have moved lower (a) followed by three areas of consolidation -- all at lower levels (b, c, and d).


Gold is a chart that I've been watching, largely because of the technical issues. Notice that prices had a difficult time getting above the 122-123 area (a). Prices have now retreated from that area (b) and are resting on the 50 day EMA (c) for technical support.


The daily chart shows the price action in a bit more detail. Notice that prices were in a range of 120-123 for about 8 days (a). Then last Thursday prices fell at the open and continued moving lower for the entire day (b).


Oil has also taken a technical tumble over the last week. Notice that prices have broken key technical support (a). In addition, the 10 and 20 day EMA is clearly moving lower and the 10 has crossed below the 20 (b).



Oil's daily chart shows a bit more detail of the price action. Prices gapped lower on Tuesday morning (a), consolidated for two days (b), then fell on Thursday morning (c) only to have prices consolidate again (d) for the remainder of the week.


The Treasury market continues in its uptrend (a), especially after breaking key resistance levels (b).

Markets Are Closed Today; We'll Be Back Tomorrow

No, There Won't Be A Double Dip

Expect the talk of a double dip recession to increase as a result of today's employment report. There are several reasons why this won't happen.

1.) Oil is still cheap.


Compare the price of oil right before the last recession (roughly $150/bbl) and today's price (roughly $80/bbl). If oil increases to say $100+, then we have an issue. But there is nothing on the chart today that indicates there is a ton of upward momentum in the market.



Interest rates are still low. The Fed is currently giving money away and the thirty year Treasury yield (pictured above) is still low. US Treasuries are still considered a safe haven which has lowered rates over the last few months to incredibly low levels.

For all the talk of double dip recession, what really caused the last one was an increase in interest rates:


Remember that Volcker increased interest rates to kill inflation. That is what caused the last double-dip recession. Given that rates are now incredibly low, don't expect that to happen again.

See also this post at The Big Picture.

Why Aren't Businesses Hiring?

There are four reasons:


Capacity Utilization is defined as:

A metric used to measure the rate at which potential output levels are being met or used. Displayed as a percentage, capacity utilization levels give insight into the overall slack that is in the economy or a firm at a given point in time. If a company is running at a 70% capacity utilization rate, it has room to increase production up to a 100% utilization rate without incurring the expensive costs of building a new plant or facility.

In other words, the chart of capacity utilization tells us there is a tremendous amount of slack in the economy. Businesses can simply tap some of this unused capacity rather than hire more employees.


The number of hours worked dropped during the recession. Companies can simply increase the hours worked by their existing work force before hiring new people.


Productivity is still increasing. This means businesses are still getting more and more out of their existing workforce. Because of high unemployment, there is the added benefit of lower wages/salaries. From a business owner's perspective, this is a win/win scenario.

Uncertainty: there has been a tremendous amount of change over the last 12 months. Businesses are still trying to figure out what that means for their bottom line. Until there are firm answers, they will freeze hiring.

Employment Down -125,000

The big reason for the drop was the departure of 225,000 census workers. Without that figure, this would have been a gain of 100,000. That is still a weak pace of job creation, but it would have obviously been better than the current headline.

Let's start with the household survey.

The civilian labor force decreased 652,000, while the civilian non-institutional population increased 191,000. The non-institutional population is the largest group in the employment statistics, while the labor force is the number of people in the non-institutional population who could work. This means the participation rate decreased by .3%, from 65% to 64.7%.

The number of people employed decreased by 301,000.

The number of people unemployed also decreased by 350,000. This combined drop int he civilian labor force and the number of unemployed led to the decrease in the unemployment rate from 9.7% to 9.5%.

The number of people working part time for economic reasons decreased by 182,000. The number of people who could only find part-time work decreased by 225,000.

The Establishment Survey

The headline number was a decrease of 125,000, but this number was skewed by the loss of census workers.

Good producing jobs fell by 8,000, largely as a result of a drop in construction employment by 22,000. Although manufacturing is clearly in a recovery, this section of the economy only added 9,000 last month. The reason for the lack of growth in the manufacturing sector is the very low rate of resource utilization, which gives factories a tremendous amount of unused slack that they can first use to ramp up production. This means there is little need for a massive rehiring of employees.

Private service producing jobs increased by 91,000 and government employment decreased by 208,000.

Average hourly earnings, average weekly hours and average hourly earnings all declined.

On a scale of 1-10, I'd give this report a 3.5 at best. Once you get beyond the headline number the reasons for it, you get a very mild increase in employment -- and one that is not what you would expect after coming out of a recession. Simply put, a second half slowdown to 1%-2% GDP growth is pretty much in the cards right now.

Yesterday's Market

Let's start with the oil market.


First, note that prices have broken a trend line (a).



A closer look at the break reveals that prices attempted to move through the 50 day EMA twice (a and b), but couldn't get through resistance. Prices have been selling off, printing large gaps lower (c) on higher volume (d).


The daily, 5-minute chart shows the downward gaps (a, b, and c) in more detail. Also note that prices were trading around the 34.80-36 level for several days, but have since moved lower.


On the SPYs, notice that the shorter EMAs are now below the longer EMAs and that two of the EMAs (the 10 and the 20) are below the 200 day EMA. Also note the heavier volume the last three days (b).


Like the SPYs, the 10 and 20 day EMAs are now below the 200 day EMA on the DIA chart.


The 10 day EMA just crossed below teh 200 day EMA on the IWMs.



Finally, remember the price of the longer end of the Treasury market in relation to the 2008 panic.

No, Really, Austerity Doesn't Work

From the NY Times:

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

Let's think about that opening paragraph for just a moment.

1.) Everyone wants to "tighten their belts."

2.) Ireland tried that two years ago.

3.) Two years later "the once thriving nation is struggling, with no sign of a rapid turnaround in sight."

In other words:

"belt tightening" does not lead to "expansion."

"But maybe if we do it, it will be different."

Well, the Baltics also tried it:

Much like Spain, Ireland and the UK, the Baltic states were badly hit by the bursting of a credit bubble in 2008 that sent their economies into freefall and their budget deficits soaring.

While others cushioned the impact with stimulus spending, the Baltic trio plunged straight into austerity. As a result, they suffered the deepest recessions in the European Union last year, with Latvia’s economy shrinking by 18 per cent.

I realize there are people out there who are unconcerned with facts; they will continue to say Washington needs to "stop spending". These people are fools.

Again, let's review the GDP equation.

C+I+X+G=GDP

Consumer Spending
plus
Investment
plus
Net Exports
plus
Government Spending
equals
GDP

According to the CBO, government spending accounts for about 20% of the US economy.

Ladies and gentlemen, this really isn't that hard.

Initial Jobless Claims Up 13,000

From Bloomberg:

More Americans unexpectedly applied for jobless benefits last week, a sign the labor market recovery may be slowing.

Initial jobless claims increased by 13,000 to 472,000 in the week ended June 26, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance rose, while those getting emergency benefits dropped after Congress failed to act on extending the legislation.

The jump in applications raises the risk that the turmoil in financial markets brought on by the European debt crisis is leading to additional cutbacks in staff. The Labor Department tomorrow may report the U.S. lost jobs in June for the first month this year, reflecting a drop in temporary federal workers who helped to conduct the decennial census.

“Initial claims for unemployment insurance benefits are moving in the wrong direction,” Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. “Jobless claims are further from levels typically viewed as signaling rising payrolls.”

Economists forecast jobless applications would fall to 455,000 from an initially reported 457,000 for the prior week, according to the median of 46 projections in a Bloomberg survey. Estimates ranged from 440,000 to 475,000.

This is the time of year when states cut back on payrolls in schools, a Labor Department spokesman said. The jump in claims may reflect even larger-than-typical reductions.

Here's a chart of the 4-week moving average. It doesn't include today's numbers, but that's not important.

This number showed continued improvement for the last half of last year. it has stalled for the entirety of this year. No number moves in one direction completely. Hence, some stalling of the number is to be expected. However, we are now beyond the stalling phase. In short, there is a serious problem that is not being addressed.

This number has been concerning me for about three months. It has now crossed the point from outlier to deep concern about the second half of this year. With the exception of last month (where the primary driver of job growth was census hires) , the establishment survey has shown continued improvement. My concern is that number and record of improvement is in serious jeopardy.

Mortgage Refinancing and Household Deleveraging

- by New Deal democrat

Yesterday the Mortgage Bankers Association reported that purchase mortgage applications dropped to their lowest level yet. Needless to say, this increases the odds of a double-dip in the 3rd or 4th quarter back into negative GDP.

That's certainly the headline, but underneath is the story of continuing household purging of debt. A couple of days ago I posted the latest household debt obligations graphs from the Federal Reserve, showing that through the first quarter of this year, households had decreased their debt obligations by almost half, measured from the beginning of the Reagan era in 1981.

This is the graph of refinance mortgage applications:

You can see that since interest rates cratered in the Panic of 2008, households have taken advantage of new lows in mortgage rates to refinance. With rates once again declining to new lows, refinancing is increasing again.

The odds are extremely good that unlike during the housing boom, refinancing is not being used to buy Hummers and swimming pools and glitz. Most likely, the monthly savings in interest payments is being used to pay down other debt. So long as deflationary forces are at work in the economy, we can expect this to play out in a once in a generation, if not once in a lifetime, purging of debt.

There are avenues of relatively more or less pain along the way, but at the end of the journey, households are going to have much better balance sheets than they did a few years ago.

Chicago PMI Drops, But Still Shows Strength

From Marketwatch:

Manufacturing activity in the Chicago region slipped a bit in June but remained at relatively high levels, according to media reports of the purchasing managers' index for the Chicago region released on Wednesday. The Chicago purchasing managers index fell to 59.1% from 59.7% in May. The drop is in line with forecasts. The report signals continued solid growth in the manufacturing sector. Readings over 50% indicate overall business expansion. The Chicago PMI is the last of a series of regional indicators that some economists say give clues to the national Institute for Supply Management manufacturers' survey for June to be released on Thursday. Based on other regional readings, economists expect the June ISM manufacturing composite to slow a bit to 59.0 from a May reading of 59.7

Let's take a look at some of the data:


Click for a larger image

Notice that the overall index, production and new orders index have been printing strong numbers for the last six months. This indicates that Chicago area manufacturing is doing well, as a reading above 50 indicates expansion.

Yesterday's Market

Let's start with the Treasury market again, as this market is still signaling extreme concern.




The 7-10 year part of the curve is in a clear uptrend (a) and has gapped higher twice over the last 5 days (b and c). Over the last two days, prices have consolidated (e) in a fairly tight range.


The long end of the curve (20+ years) has two trend lines (a and b). It has gapped higher three times in the last week (c, d and e).


Looking at the A/D line for the long end of the curve we see some very interesting things. First, note the line was much lower during the end of 2008 panic (a). Next, notice the line increase at the beginning of this year while the market was going down (b). This indicates that people were concerned about the economy at the beginning of this year and were accumulating sage assets. Finally, notice that the line is now at very high levels (c). All of this tells us that there is a tremendous amount of volume moving into the market, and this situation has existed since the beginning of the year.


It's beginning to look as though the industrial metals chart was forming a double top over the last half year (a and b). Notice the large volume sell-off that occurred after each of the tops. There is still a great deal of concern about China right now, leading to the sell-off.



Perhaps the one saving grace of the current situation is oil, which is still cheap compared to the price spikes we saw at the end of the last expansion. Compare price levels a and b.


Equity prices are still in a clear downward trend. They first moved lower (a), followed by two days of consolidation (b). Next they gapped lower (c) and consolidated over two days (d). Finally, notice that prices broke lower at the end of yesterday's trade (e).