Monday, May 20, 2013

Market Analysis: US

Last week, we received continued confirmation that the US economy is growing, although at a weak pace.  Let's look at the day.

The Good

LEIs Increased: (From the report): The Conference Board LEI for the U.S. increased in April after a small decline the month before. Large positive contributions from building permits, initial claims for unemployment insurance (inverted) and all the financial components offset negative contributions from consumer expectations, average workweek in manufacturing and ISM® new orders. In the six-month period ending April 2013, the leading economic index increased 1.7 percent (about a 3.5 percent annual rate), faster than the growth of 0.5 percent (about a 1.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.

Of the 10 components, 3 were negative.  This tells us there was a fair amount of breadth to the latest reading.  In the preceding LEI reading, the components were equally balanced between positive and negative, leading to the .1% contraction.  Most concerning in this data is the continued weak reading in the average workweek for production workers, which has been stable for seven months. 

Consumer Sentiment Increased: Consumer spirits are improving dramatically this month in what very well may be a reflection of improvement in the jobs market. The consumer sentiment index jumped to 83.7 for the mid-month reading vs 76.4 for the final April reading and vs April's mid-month reading of 72.3. The Econoday consensus was looking for 78.0 with the high-end estimate at 82.5. The latest reading is near the recovery high set in November.

Consumer activity has been remarkably resilient after the increase in withholding taxes at the beginning of the year.  Considering this is still 70% of US economic activity, this increase is a good thing.

Prices are contained: The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.  Producer prices decreased .7%/

As I noted several times last week (see here, here, here and here) inflation is a non-issue right now.  In fact, one could argue that the greater threat is still one of potential deflation rather than inflation.

The Bad:

Housing metrics took a hit: housing starts decreased 16.5% from the previous month.  However, housing permits increased 14.3%.   As of now, this is a one month statistical point that could simply be noise.  However, we do want to keep an eye on this metric as the housing market's rebound is a very important part of the ongoing recovery in the US economy.

Manufacturing took more hits:  As I noted above, the near stagnation in the workweek for production workers over the last seven months is concerning.  In addition, the Empire State manufacturing number fell to -1.4, the Philly Fed manufacturing number fell to -5.2 and industrial production contracted .5%.  The IP contracted was especially concerning as it's decline was very broad based.

Manufacturing renaissance in the US has been a most untold story for this expansion.  However the recent spate of data -- especially its broad base -- indicates an overall slowdown may be occurring.  This does not appear to be a contraction, but a reading just above expansion on the next ISM number (a reading just above 50) looks more and more likely.

Conclusion: we're still where we've been for an extended period of time.  The US economy is growing, albeit weakly.  Both internal and external demand is weak at best.  We're also probably seeing some effects from the sequester kick in.

Let's turn to the US markets:

The SPYs are still very much in a bull market.  The uptrend started in mid-November continues to move higher, with the index printing a series of higher highs and higher lows.  The EMAs continue in their bullish orientation -- all are rising, the shorter EMAs are above the longer EMAs and prices are above all the EMAs.  Momentum is positive and increasing and money is flowing into the market. 

The weekly chart displays the exact same patterns.  Prices are printing higher highs and higher lows with a bullish underlying EMA picture.  Momentum is positive and strong and the CMF reading shows a big influx of money.