Saturday, October 22, 2011

Weekly indicators: contraction abates edition

- by New Deal democrat

In monthly reports, September's Leading Indicators were reported up 0.2. Despite the fact that this index has been positive for 5 straight months, the spokesman for the Conference Board suggested that there was a 50% chance of a recession. Doesn't the Conference Board have confidence in its own numbers?

Industrial production rose 0.2. Capacity utilization rose 0.1%, but only with an equal -0.1% revision to August. Housing starts had a very strong September, while permits declined slightly under the 600,000 level. The Empire State and Philly regional manufacturing indexes were mixed. Inflation at the wholesale and retail levels remained hot, with PPI up 0.8% in September, and CPI up 0.3% and also up 3.9% YoY. That inflation is this high, with virtually flat wages, means that the average American is in no shape to re-ignite strong growth.

The high frrequency weekly indicators were very mixed this week. Some showed good growth, while others continued to signal contraction.

On the jobs front, the BLS reported that Initial jobless claims fell 1,000 to 403,000. The four week average decreased to 403,000. With the exception of 8 weeks at the beginning of spring, the four week average is the best reading in over 3 years.

The rest of the jobs-related indicators were weak. The American Staffing Association Index remained at 90 for the 4th straight week. This series remains lower YoY.

Further, adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that for the first 13 days of October, $96.1 B was collected vs. $97.7 a year ago. For the last 20 days, $130.4 B was collected vs. $132.7 B a year ago. This continues the string of actual negative readings and so continues as an ominous sign for jobs.

Housing was mixed. The Mortgage Bankers' Association reported that seasonally adjusted purchase mortgage applications decreased 8.5% last week. On a YoY basis, purchase applications were also down 5.1%. Generally speaking, in the last couple of months purchases mortgage applications have established new lows (the lowest since 1996 says the MBA), but only slightly lower than the flat range they had been in for the prior 15 months. Refinancing decreased 18.6% w/w. Refinancing has been very volatile and affected by small changes in interest rates.

As to housing prices, however, YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker showed that the asking prices declined only -0.8% YoY. Like almost every single week for the last couple of months, this is yet another record smallest YoY decline in the 5 1/2 year history of this series. The areas with YoY% increases in price remained at 16. The areas with double-digit YoY% declines remained at only 2. If the current trend continues, nationwide asking prices may turn YoY positive next month.

Several of the remaining series put in good numbers. Retail same store sales had another good week. The ICSC reported that same store sales for the week of October 15 increased 3.6% YoY, and increased 0.1% week over week, Shoppertrak reported that YoY sales rose 6.5% and increased 4.0% week over week.

Weekly BAA commercial bond rates increased .26% to 5.52%. Yields on 10 year treasury bonds also increased .29% to 2.22%. This is a good reading for a change -- the spread between the two rates decreased and increasing rates in both shows less fear of deflation.

The Money supply surge appears to have ended. M1 declined -1.9% for the week. It remains up 2.4% m/m, and 21.6% YoY, so Real M1 was up 17.7%.
M2 rose 0.2% w/w. It remained up 1. 4% m/m, and 10.2% YoY, so Real M2 was up 6.3%. The YoY increase in both M1 and M2 nevertheless continue near historic high levels.

Rail traffic remained mixed. The American Association of Railroads reported that total carloads increased 1.3% YoY, up about 7200 carloads YoY to 547,800. Intermodal traffic (a proxy for imports and exports) was up 7200 carloads, or 3.0% YoY. The remaining baseline plus cyclical traffic was unchanged or 0% YoY. Total rail traffic has improved in the last few weeks after having turned negative for 6 of 12 weeks during the summer. Using the breakdown of cyclical vs. baseline traffic from Railfax, baseline traffic was down 6200 carloads, or -3.1%YoY, while cyclical traffic was up 6300 carloads, or +6.1 % YoY.

The most negative reading again goes to Oil, which finished at $87.40 a barrel on Friday. This is about $7 below its recession-trigger level. Gas at the pump rose $.06 to $3.48 a gallon. Measured this way, we probably are still about $.20 above the 2008 recession trigger level. Gasoline usage was down -3.3% YoY, at 8598 M gallons vs. 8891 M a year ago. Gasoline usage is a concurrent recessionary reading, while the decline in prices in the last 6 months suggests a resumption of expansion soon.

There certainly appears to have been some improvement in these weekly indicators from their post debt-debacle contraction. That is certainly good news. On the other hand, there is nothing in these numbers to suggest a strong rebound is underway, particularly when it comes to jobs.

Have a nice weekend.

Friday, October 21, 2011

Slow uptrend looks intact

- by New Deal democrat

In the last week we got three important points of data for September, each consistent with the continuation of a slow uptrend.

First, we got the long leading indicator of housing permits:

Only once between May 2010 and April 2011 were there more than 575,000 permits issued on an annualized basis. Since then, every single month has been above 575,000. While September's reading of 594,000 is at the low end of the trend and is also consistent with the series rolling over, I will not be concerned unless we break back below the 575,000 level.

Second, we got the short leading indicator (especially for jobs) of real retail sales:

Due especially but not exclusively to vehicle sales, this was the best reading in months. In real terms, retail sales have made up 75% of their decline in the last recession.

Finally, we got the coincident indicator of industrial production:

This also recorded a slight gain (although since August was reduced from positive to flat, the net result is a sideways movement m/m). Industrial production has now recovered 60% of its decline during the last recession.

Manufacturing remains an important point of concern, but for September the slow uptrend stayed intact.

The Beige Book, Pt. II

From the Federal Reserve:
Consumer spending was up slightly in September. The majority of Districts reported increases in auto sales, with the largest improvements in San Francisco and New York. Several Districts noted a greater availability of new vehicles as the supply disruptions that had plagued auto dealerships in the aftermath of the Japanese disaster subsided. Contacts in the Cleveland, New York, Philadelphia, and Dallas Districts indicated that demand for used cars remained high and that some models were still scarce. A large number of Districts reported that non-auto retail sales were flat to down in September; but a few, such as Philadelphia, Richmond, and Dallas noted an increase in customer traffic late in the month and into early October. Back-to-school sales were described as being fairly strong in New York and satisfactory in Richmond. In addition, Boston, Chicago, Kansas City, and Dallas cited some strength in the sales of big-ticket or luxury items, while Minneapolis and Chicago noted that more consumers were trading down to value products at grocery stores.
The above report shows weak growth.  Spending was "up slightly."  The best news is the increase in auto sales, which shows some confidence in the future as long-term financing is typically required for these purchases.  However, the fact that non-auto purchases were weak or down in most districts is concerning.

Let's look at the data.

Real PCEs have risen higher than their previous peak during the last expansion.  However, their increase has stalled over the last 6 months; they flat-lined for four months, bumped up higher and then moved sideways again last month.

Services are largely responsible for the increase in PCEs (remember, these account for about 65% of PCEs).  Service expenditures continue higher.

Add caption
Non-durable goods purchases (which account for about 22% of PCEs) have stalled for the better part of a year.

Durable goods purchases -- like non-durable goods purchases -- have been moving sideways for about a year as well.

Real retail sales were also moving sideways for 7 months, but bumped higher last year.

Consumer spending in the form of PCEs is still weak, with most of the gains coming from the purchase of services.  In short, the consumer is in fair shape at best.

Morning Market

The markets are still in a holding pattern as evidenced by the charts below:

Equities, bonds and the dollar are all in a tight range.  That, of course, leads to a very important question: why?  What does a holding pattern mean?  The smart-ass answer is "there are an equal number of buyers and sellers."  But, there is, in fact, a deeper reason: the absence of strong sentiment in either direction.  There is almost a perfect balance between good and bad sentiment, meaning traders are waiting for ... something.

Thursday, October 20, 2011

Food Prices Are Still A Concern

From the last CPI release:
The food index, which rose 0.5 percent in August, increased 0.4 percent in September. The index for food at home repeated its July and August increase of 0.6 percent. The index for nonalcoholic beverages was unchanged, while the remaining major grocery store food groups all posted increases. The dairy and related products index rose the most, increasing 1.2 percent, followed by 0.9 percent increases in both the cereals and bakery products index and the fruits and vegetables index. Within the latter group, the indexes for apples and tomatoes both posted significant increases. The index for meats, poultry, fish, and eggs rose 0.4 percent as the index for eggs rose sharply, and the index for other food at home rose 0.6 percent. The food at home index has now risen 6.3 percent over the past 12 months with the dairy index up 10.2 percent over that period. After rising 0.4 percent in August, the index for food away from home increased 0.2 percent in September and has risen 2.6 percent over the last 12 months.
Let's go to the charts:

First, I use January 1, 1985 as the starting point because this is mid-way through the decade after Volcker wrung inflation out of the economy.  Secondly, overall food inflation is still moving higher at strong rates.  While the economy of the 1980s could handle current YOY levels, the economy of the early 2000s could not.  In short, this chart is pretty concerning. 

Meat, fish, poultry and eggs are increasing at strong rates, although YOY prices increased reached this point before without causing a recession.

Fruits and vegetables are also increasing, but, again, at rates the economy has withstood before.

Daily prices are also at high levels.

Food at home is increasing at strong paces.

My concern with the above numbers is these are price increases we see every day -- or at least once a week.  As such, we are aware of them in a pretty big way.  And the kinds of increases the charts are showing are enough to slow purchases of other items, thereby lowering overall aggregate demand. 

The Biege Book, Part I

Yesterday, the Federal Reserve released the Beige Book.  This is one of my favorite economic pieces of information because, every 6 weeks, we get a complete, macro-level view of the US economy from a variety of angles.  Let's start with the overall conclusion:

Reports from the twelve Federal Reserve Districts indicate that overall economic activity continued to expand in September, although many Districts described the pace of growth as "modest" or "slight" and contacts generally noted weaker or less certain outlooks for business conditions. The reports suggest that consumer spending was up slightly in most Districts, with auto sales and tourism leading the way in several of them. Business spending increased somewhat, particularly for construction and mining equipment and auto dealer inventories, but many Districts noted restraint in hiring and capital spending plans. By sector, manufacturing and transportation activity was reported to have increased on balance. A few Districts also reported slight improvements in construction and real estate activity; nonetheless, overall conditions for both residential and commercial real estate remained weak. Districts reporting on nonfinancial services cited mixed results with activity varying widely by industry. Loan demand by and large moved lower, with the exception of an increase in mortgage refinancing in many Districts. Crop conditions at harvest were generally less favorable than a year ago. In contrast, energy and mining activity continued to strengthen in several Districts, with the exception of some storm-related slowdowns in the Gulf of Mexico. Cost pressures eased in the majority of Districts, though there was some further pass-through of earlier increases to downstream prices. Wage pressures remained subdued outside of a few exceptions in which firms noted having difficulty finding appropriately skilled workers.

The overall trend is for below trend growth; growth was "modest" and business spending was up slightly.  Although still in terrible shape, there was a slight uptick in real estate.  Loan activity dropped, which jibes with the statement that the business outlook is mixed.  In short, we're probably in a period of 0%-2% growth.

Morning Market

Yesterday, I noted the markets were continuing in their period of consolidation -- a pattern which continued throughout yesterday's trade.  Notice that equities are still consolidating after a rally and treasuries are consolidating after a sell-off.

Let's take a look at some of the daily charts.

Prices are consolidating above the 50 day EMA.  At one point yesterday they even hit the 200 day EMA only to move lower.  The 10 day EMA has crossed above the 50 and the 20 is nearing that point.  All three shorter EMAs are moving higher.  This chart is turning more and more bullish, but to really confirm that statement we need to move about the 200 day EMA on decent volume.

Both the A/D and CMF indicate money is flowing into the market, but not at a really high rate.  The MACD tells us that momentum is on the bulls side.  Also note the MACD has crossed about "0" -- another positive development.

In contrast, the 7-10 year treasury market, is consolidating around the 50 day EMA. Both the 10 and 20 day EMAs are moving lower, but we haven't seen a bearish cross yet.  Also note the angle of decent for the shorter EMAs is less than desired.

While we have seen a huge shift in momentum, we aren't seeing a huge move out of the market from a volume perspective -- which is very interesting, especially considering the drop we've seen in prices.

While we can talk about ideal reversals, we're not going to see the perfect reversal ever.  What's interesting here is the lack of volume confirmation on both sides; volume moving into equities is weaker than desired and volume moving out of the treasury market is weaker than desired.  This tells me ultimately that this might not be a true reversal after all. 

Wednesday, October 19, 2011

The Automation Issue

From Reuters

For decades, American workers and their machines advanced in tandem. As companies invested in technology, more workers were needed to operate machines.

That relationship is now looking unsteady.

Since 1999, business investment in equipment and software has surged 33 percent while the total number of people employed by private firms has changed little.

The gap between man and machine widened even further after the 2008-09 recession, helping explain why the United States is struggling to bring down an unemployment rate stuck above 9 percent.

The revolution in information technologies is taking a deeper and deeper hold in the U.S. economy.

Throughout history, technology revolutions have paved the way to forms of employment: Britain's 19th century industrial revolution threw artisans out of work but eventually created mass employment in factories.

But a decade-long drought in jobs in the United States is raising questions whether there is a fundamental shift in the structure of the labor market.

"Labor and capital are out of sync," said Tyler Cowen, an economist at George Mason University in Fairfax, Virginia. "It seems be a growing and strengthening trend... (and) suggests there is this longer-term structural change."

This is something I've commented on before, especially when talking about manufacturing employment.  It's actually a very big issue going forward.

The EU Situation, the Dollar and the Euro

The chart above is a simple line chart of the dollar and the euro over the last few months.  Notice the near inverse relationship, especially starting at the end of August.  At this time, the dollar really became a safe haven for traders while the euro was in a clear "risk off" mode.  That perception has changed over the last few weeks as it appears Europe may be getting their act together a bit, making the euro more attractive and the dollar less so.

Empire State Manufacturing Index Still Weak

From the NY Fed:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to deteriorate in October. The general business conditions index remained negative and, at -8.5, was little changed. The new orders index hovered around zero, indicating that orders were flat, while the shipments index rose above zero to 5.3. The inventories index stayed below zero, a sign that inventories declined. The indexes for both prices paid and prices received fell, but remained positive, suggesting that price increases moderated. The index for number of employees rose several points but was at a relatively low level of 3.4, while the average workweek index was negative for a fifth consecutive month. The future general business conditions index dropped six points to 6.7, its lowest level since early 2009, while future indexes for prices paid and prices received declined.

The good news is this hasn't gotten much worse.  The bad news, the index has been hovering below the 0 line for the last few months, and there is little evidence we'll see a strong pop in the next month, or maybe through the end of the year.  None of these are good developments, especially considering that manufacturing was a primary driver of the expansion.

Morning Market

At the beginning of this week, I noted the markets were in a risk on trade posture; money was flowing into equities and out of treasuries.  For the last few days, we've seen this trend halt and tread water.  Both equities and treasuries are consolidated at the top and the bottom of their recent trade activity, respectively.  Consider the charts below:

The SPY's have been consolidating between 119 and 122.5 for the last four days.

The QQQs have been consolidating between 56.75 and 58.

The IEFS have been consolidating between 102.2 and 103.5.

The TLTs have been consolidating between 113.5 and 116.5.

So -- what's going on here?  The risk on trade was heavily influenced by the perception that the EU was getting their basic problem under control.  However, yesterday Germany announced that the upcoming meeting wouldn't solve the problem, so now we're back to wondering what exactly is going to happen on the continent.  However, there is also a fair amount of momentum built into the market right now, so there isn't a reason to sell yet.

Tuesday, October 18, 2011

Bonddad Linkfest

  1. UK inflation over 5%
  2. Moody's threatens to lower France's credit rating
  3. Two Fed presidents differ on economic situation
  4. Greek austerity plan will lower growth 
  5. Corn and soybean consumption estimates
  6. Anger is the common thread to the OWS crowds
  7. North Texas hit with dust storm
  8. China's growth slows to 9.1%
  9. The seven biggest economic lies (plus a bonus 7 MORE!) 
  10. World trade hits a soft patch

Two Charts on Industrial Production

Yesterday, the Fed released the industrial production numbers.  I hadn't looked at the data series in a few weeks, so I took another look and found the following for both industrial production can capacity utilization:

Both of these data series can be broken down into two periods.  The first is a sharp and strong rebound from the contraction.  That lasted until about the beginning of this year, when we still saw increases, but the pace of the increase slowed.  This jibes with our overall experience in the economy as a whole.  We're still seeing growth, but at an agonizingly slow pace.

The utilization numbers indicate there is still a fair amount of slack in the system, allowing producers to absorb any commodity price spikes at the gross input level. 

Two Charts That Deeply Concern Me

China is now the engine that drives the world economy.  The first chart is the FXI -- or the ETF for China.  Notice it is near yearly lows and is also in a clear downtrend.  The second chart is copper, which is used in everything.  Hence, demand for the metal is a good indicator of the economy's overall health.  Notice that this chart is also near a yearly low and is also in a clear downtrend.

When the word's growth engine is a downtrend and the primary industrial metal is in a downtrend, you know there's a problem somewhere.

Morning Market

Yesterday, I noted that with equities moving beyond the 50 day EMA in some cases, the next stop would be the 200 day EMA, although a sell-off to the EMAs would not be unheard of.   That appears to be what the markets are doing -- at least for now -- with prices selling off a bit to the 50 day EMA as traders take some profits.

The 7-10 year treasury market is still below the 50 day EMA, despite the rise in yesterday's trade.  The short-term trends are all moving lower -- the 10 and 20 day EMAs are both heading south.  For prices to make a move through the EMAs would require a pretty strong shift in sentiment.

Oil is in the middle of a decent little rally.  After hitting the 75 handle, prices have advanced, moving through the 10 and 20 day EMA, hitting the 50 day EMA and then selling off for a bit and are now trying to advance beyond the 50.  But this rally plays into the return of the "risk on"trade we've seen over the last few weeks.

Monday, October 17, 2011

Bonddad Linkfest

  1. Anadarko settles with BP for $4 billion (read -- someone had a lot of liability outstanding on this one)
  2. Student debt situation likened to sub-prime crisis
  3. Ohio fights about collective bargaining
  4. Japan's government cuts view of economy 
  5. The most important chart of the day
  6. Residential remodeling index at high levels
  7. Third quarter recession increasingly unlikely
  8. Will lower commodity prices lead to lower food prices?

Any Rand -- Idiot Of the Highest Order

From the Big Picture
“There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves Orcs.”
First, I almost sent a bill to Barry for a new computer screen when I saw this quote; I found it that funny.  But, there is a certain "it wouldn't be funny if it weren't so true" element to it.

Here's the basic deal with Ayn Rand: she wrote fiction.  Yes, I realize it's an allegory, but that's not the point.  She could have said everything she needed to say in a few simple sentences, such as, "my work is mine alone to do with as I please, regardless of the choices I make regarding its use."  Instead, we're treated to a 1000 page pedantic monstrosity.  BORING.

I should also add -- for those of you who keep threatening to "go Galt," shut up and get on with it.

Employment Thoughts

Last week, I took an in-depth look at the employment situation (see here, here, here and here).  After looking at the data, there are my thoughts

Despite being responsible for a fairly large percentage of GDP growth, manufacturing jobs just aren't growing by a large amount.  There are a lot of reasons for this, but I believe the biggest one is the increased use of automation in the manufacturing process.  It just doesn't take that many people to make things anymore -- a trend which is probably going to continue for the foreseeable future.

I thought it was interesting that financial jobs are still declining.  This indicates there was a glut of jobs in this area at the top of the last expansion.

The relative weakness in retail jobs adds credence to the "lack of demand" arguments regarding the economy as a whole.

Education and health care jobs were more or less immune to the recession -- although, in fairness, I think the real issue here is the continued growth in health care jobs rather than education jobs.

The continual, slow bleed of government jobs is a huge problem, and one that cannot be over-stated. As I've stated many times, I believe this continual, slow-bleed is responsible for initial unemployment claims hovering around the 400,000 mark for most of this year.

Professional job growth has actually been pretty fair.

However, at the heart of the issue is slow growth in relation to total jobs lost.  This is the biggest problem we face.  While the worst of the job losses is over, the lack of meaningful job gains is what is really driving people's concerns.  And while the economy has created over 2 million jobs during the expansion, this rate of creation has not made a dent in the unemployment rate.  That is the real issue we face.

Morning Market

Right now, we're in the middle of a "risk on" trade.  Money is flowing into equities and out of treasuries.  Also of importance is the dollar's drop, which is a direct reaction to the euro rallying and the belief that the EU situation is coming to a resolution.  This is obviously commodity bullish.

Let's start with the equity markets:

The best example of the latest rally is the run in the IWMs; which are in the middle of a very strong rally.  Prices are in a clear uptrend and have moved through important resistance levels on a regular basis.

On the daily chart, notice that prices have moved through resistance levels and three of the EMAs -- the 10, 20 and 50.  The 10 and 20 day EMA are both moving higher, and the 10 has crossed over the 20.  Since prices have moved through the EMAs, the next area of resistance is the 200 day EMA.  However, at some point I would expect a sell-off to some important technical level, with the 50 day EMA being the most likely.

In contrast to equities, the 7-10 year treasury sold off the week before last and spent last week consolidating losses.

On the daily chart, we see that prices are consolidated below the 50 day EMA and remained there for last week.  Also note the 10 and 20 day EMAs are moving lower with the 10 day crossing below the 20.

The above charts clearly show the "risk on" trade is in full force.  However, I am still concerned about the lack of support from the economic fundamentals.  In short, the economy appears to be teetering on the 0% growth mark.  This is not a level of economic activity that would support a strong risk on trade.  In addition, there is little coming down the pike to indicate increased economic activity.

As it appears that the EU situation resolving, traders have moved out of the dollar, as seen on the 5-minute chart.

The daily chart shows the severity of the sell-off, with the dollar moving below all the EMAs.  Also note the shorter EMAs are both moving lower and the 50 day EMA is moving sideways.