Monday, September 23, 2013

Economic/Market Analysis: US

The best news of the week came from the Conference Boards LEI and CEI release:

The Conference Board LEI for the U.S. increased in August for the second consecutive month. The improvement in the LEI was driven by positive contributions from the interest rate spread, ISM® new orders, average workweek and lower initial claims for unemployment. In the six-month period ending August 2013, the leading economic index increased 2.1 percent (about a 4.3 percent annual rate), marginally faster than the growth of 2.0 percent (about a 4.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than weaknesses in recent months.

The Conference Board CEI for the U.S., a measure of current economic activity, also improved in August. The index rose 0.9 percent (about a 1.9 percent annual rate) between February and August 2013, slower than the growth of 1.2 percent (about a 2.3 percent annual rate) for the previous six months. However, the strengths among the coincident indicators have remained very widespread, with all components advancing over the past six months. The lagging economic index continued to increase, but at a higher rate than the CEI. As a result, the coincident-to-lagging ratio is down slightly. Real GDP expanded at a 2.5 percent annual rate in the second quarter of the year, after increasing 1.1 percent (annual rate) in the first quarter.

Here's a table of the last 6 months of readings:

One of my concerns with this data series over the last few months has been its weakening internal condition, as a larger number of the individual data points printed in the negative.  Last month, the only negative reading came from building permits.

The housing market also provided us with important information.  First, existing home sales increased 1.7% with 4.9 months of inventory available.  The good news here is that sales keep increasing, but we're also seeing an uptick in inventories, which will eventually help to ease price increases.  Housing starts increased .9%.  While this number is positive, it's been stabilizing at current levels for the last several months.  I'll have more on this later this week.  Finally, the NAHB homebuilders index was unchanged at 58.   

Last week there was a ton of information released on the industrial sector, starting with the .4% increase in industrial production.  The increase was broad-based, with all sectors save utility output expanding.  Capacity utilization also increased, but remember that its level is still below pre-recession peaks. The Empire State manufacturing index decreased, but still printed a positive number at 6.3.  This number has been fairly weak for most of the year.  In contrast was the Philly Fed manufacturing index, which increased strongly, moving from 9.3 to 22.3.  New orders and shipments also increased sharply.  The balance of the IP news (which is a coincident economic indicator) was positive.

The overall tenor of the news this week was positive.  It appears the manufacturing sector is trying to advance beyond its recent doldrums.  Housing is slowing, but that would be a logical development considering the increased rate environment we are now seeing.  I wouldn't be surprised to see the industry eventually pause at current levels of activity as a result of higher interest rates.  Finally, the LEIs were a welcome development as they indicate forward economic momentum is occurring.

Let's turn to the markets.

There's good and bad news on the SPY chart.  The good news is it printed a new high last week, the third in a successive period of higher highs (see the 167 print in May, 170 in early August and 172 last week).  However, notice the rate of increase (the arcing blue line above prices) is becoming less steep, indicating momentum is decreasing.  I'm beginning to think we're going to end the year close or slightly above current levels.

Last week we saw both the belly of the curve (IEFs, top chart) and long end (TLTs, bottom chart) rally in reaction to the Fed announcing it won't taper this month.  But both of these are temporary aberrations.  While there will be no tapering this month, it is sure to happen at some time with the likely occurrence being sooner rather than later.  As such, the real issue for the above ETFs is whether support holds at current levels.