Saturday, April 9, 2016

Weekly Indicators for April 4 - 8 at

 - by New Deal democrat

My Weekly Indicator post is up at .

Rail traffic remains awful, but the bigger news is the major decline in corporate bond yields.

Friday, April 8, 2016

Wholesale inventories and sales: bad news for Q1, good news for the year

  - by New Deal democrat
While this morning's report on wholesale sales and inventories for February isn't good news for Q1 GDP, in the longer term it means that the inventory correction is working itself out. 
Let's start with the updated inventory to sales ratio for wholesalers, which declined .01 from 1.37 to 1.36:

Wholesale inventories dropped 0.5 percent in February, the Commerce Department said on Friday, the sharpest decline since May 2013. Analysts polled by Reuters expected a 0.1 percent decline.The government also revised its reading for January to show a 0.2 percent decline in inventories rather than a 0.2 percent rise. 
Wholesale sales, meanwhile, slid 0.2%.
January's -1.3% decline in sales was also revised down -.2% to -1.5%. 

More often than not, a big increase in the inventory to sales ratio is accompanied by a recession. But a minority of the time, it is just an inventory correction - most importantly, in 1998 when the US$ soared, just as it did in 2014-15. In either case, sales lead inventory, as shown in this graph through December (FRED won't update until next week):

In the inventory correction scenario,
- pressure of the US$ eases - which it already has this year.
- commodity prices firm - which appears to have happened beginning last November.
- new orders increase - which we have from the ISM new orders index in the first three months of this year.
- inventory continues to decline - this is now established for wholesalers for the last 5 months.
- sales increase - not yet (as of February)!
So while a negative GDP print for Q1 becomes more likely (as forecast by the Leading Indicators last summer), the progression of numbers gives me increased confidence that the shallow industrial recession that was caused in large part by the surge in the US$, is coming to an end.
Next week watch for producer prices of commodities YoY.  Here's what they look like now:

If they get "less bad," that is more evidence that this has been an inventory correction that won't grow into an actual recession.

From Bonddad:

A few points:

Here's a 5-year chart of the US dollar:

The overall level has moved lower since the end of last year.  But the real test will be a move below the ~93.75 level.  With the Fed on the sideline for now, that's a distinct possibility.

I'm not completely sold on the rebounding commodities story.

The weekly oil chart is still very bearish.  While prices broke through upside resistance a few weeks ago, they have since retreated below important technical levels.  I'd need to see a move above the 50-week EMA to be sold on the rebound or bottoming story.

Industrial metals have a similar weekly chart to oil:

Like oil, we've seen a nice bounce.  But the fundamental picture is still bearish.  China is slowing, lowering their demand.  The global build-out in raw material extraction over the last 5+ years is forcing basic materials companies to continue producing to at least cover fixed costs.  This keeps supply flowing, adding further downward pressure on prices.  So we're seeing an increase in product and lower demand occur when there is weak global demand.

I'm more comfortable with an assessment that a bottom may by in.

Bonddad Friday Linkfest

We'll be doing our regular Monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

EM Bonds Have Upside Room to Run

Thursday, April 7, 2016

The Bond Market Is GDP Bearish

In today's linkfest, I linked to a post from the Capital Spectator that argues (I believe convincingly) the treasury market is predicting a weaker equity market.

I wanted to briefly expand on the author's point.  

Treasuries rally when traders see weaker economic growth and, in correlation, lower inflation.  The reason is simple: slower economic growth leads to lower revenue growth, leading to weaker earnings. And weak earnings are a drag on equity indexes.  In addition, in a weaker growth environment, traders like to increase the treasury component of their portfolios for their stable and predictable return.  Finally, weak growth usually leads to lower inflationary pressures.  

The converse is also true: when traders see stronger fundamental growth, they sell treasuries, opting for the potentially higher returns of the equity market.  In addition, stronger growth usually leads to increasing inflation.

That being said, here is the weekly chart for the IEFs -- the 7-10 year treasury market ETF:

The market has been in an uptrend since the end of 2013.  Let's now turn to the TLTs:


There are three primary patterns.

1.) A rally from the end of 2013 to the beginning of 2015
2.) A brief sell-off followed by a triangle consolidation in 2015
3.) A rally through upside resistance of the consolidation triangle at the beginning of 2016.

Notice there is no sell-off in sight.

Consider the above developments in conjunction with the latest release from the Atlanta GDP Now model:

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.4 percent on April 5, down from 0.7 percent on April 1. After yesterday morning's light vehicle sales release from the U.S. Bureau of Economic Analysis and the manufacturing report from the U.S. Bureau of the Census, the forecast for real GDP growth declined from 0.7 percent to 0.4 percent due to declines in the forecasts for real consumer spending growth and real equipment investment growth. The forecast for real GDP growth remained at 0.4 percent after this morning's international trade report from the U.S. Census Bureau, as a slight decline in the forecast for real net exports was offset by a slight increase in the forecast of real equipment investment growth.

The model has been decreasing since the beginning of February.

Overall, 1QGDP does not look good right now.

Bonddad Thursday Linkfest

We'll be doing our regular Monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Wednesday, April 6, 2016

Jazz Shaw Now Relies on Discredited Research For Bogus Minimum Wage Argument

I've blogged about Jazz Shaw several times before (see here, here and here).  He is economically incompetent.  Of course, that doesn't stop him from writing about economics.

He has relied on the works of Mark Perry of the AEI to argue an increase in the minimum wage causes job losses.  However, it turns out some of Mark Perry's assertions were based on, shall we say, highly questionable data methods.  Reid Wilson and H. Luke Shaefer at the University of Michigan document the faults at this link.  This type of issue brings into question all of Mr. Perry's assertions and, by way of extension, Mr. Shaws arguments.

If Mr. Shaw were an honorable or ethical man, he would print a retraction of his arguments.  

I'm not holding my breath.

JOLTS, Labor Market Conditions Index give different clues to job growth

 - by New Deal democrat

After a blizzard of data last Friday, this week is pretty desolate.  But we do have two follow-up reports on the labor market: the Labor Market Conditions Index, and the JOLTS report.

Let's start with the LMCI.  As I have previously noted, the LMCI shows promise as a long leading indicator, as 40 years worth of data shows it turning negative usually a year or more before the onset of a recession:

As you can see, it also does a good job forecasting the YoY direction of job growth.

This month's report was the third in a row that was negative.  This is another small addition to the evidence that 2017 might be a poor year.  It also suggests that monthly job gains, currently averaging just under 225,000, will continue to decelerate.

Now let's turn to the JOLTS report.  While it is an extremely useful dissection of the labor market,  it has only existed for 15 years, and thus includes only one full expansion.  Comparing this month's report with those of a few months ago shows why trends in the report must be taken with many grains of salt.

For the last year I was unimpressed with the report.  True, job openings (blue in the graph below) were soaring to new heights, but actual hires (red) stalled -- the same pattern as in 2005-06. late in the last cycle.  Two months ago openings decreased significantly - something which happened just before the 2007 recession started.  Here is the complete series, including yesterday's report for February:

The pattern from the last expansion was: first, hires peak.  Then, openings peak.

Here is a YoY look at the same data:

Openings had been rising faster than hires, which are have been barely positive.  Until two months ago, when hires soared to a new all-time high, as shown in the first graph above at far right.  Since then, the upward trend in hires has remained.

Some more good news was contained in the quits rate, which also continued in an uptrend, if not quite at their record of two months ago (red in the graph below):

This means that workers were confident enough in their prospects to voluntarily leave their jo bs.  Note that layoffs (blue) remained low.  Needless to say, the increase in voluntary quits is a significant positive.

Further, last month  Dean Baker made a point that there is "pent up damend" for quits, and therefore they should continue to all time record highs. Here's a link to a graph of the U6 underemployment rate (inverted) vs. Quits:

For every level of underemployment over the last 3 years or so, there have been more Quits than occurred during the last cycle -- supporting the  hypothesis of "pent up demand."

So, while the LMCI continues to suggest a maturing expansion, this month's very positive JOLTS report - if the trends from the last expansion repeat themselves - suggests that job growth has a ways to go.

Bonddad Wednesday Linkfest

We'll be doing our regular Monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

JOLTS quits and hires

Monday, April 4, 2016

Time to Move Into Brazil?

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Brazil is in the middle of a very serious political crisis along with a terrtible economic situation.  Yet the weekly chart of the Brazilian ETF shows prices have moved through key resistance.  Does this mean it's time to start nibbling at this ETF?

Let's start with the positve by looking at the weekly chart of the EWZ:

There are two key bullish developments: prices breaking a downtrend that started in 3Q14 along with plenty of upside momentum "room to run."  The former indicates we're seeing traders begin to take at least small positions in this ETF in anticipation of a rebound.  Furthermore, the MACD indicates this ETF could rally to a considerable degree.

Now for the bad news: the country is in terrible shape.  First of all, the current president faces impeachment.  Other members of the government are embroiled in a very large corruption scandal and the judiciary is under popular fire.  I make no predictions about the potential outcome.  I only note this in a very large crisis that endangers the entire political culture.

Second, the economy is in terrible shape:

Taking the charts in top to bottom order:

  1. The economy has contracted for a year.  Remember that the textbook definition of a depression is six consecutive quarters of contraction.
  2. Unemployment is increasing.
  3. Prices are rising,
  4. So the central bank increased interest rates to 14%, essentially slamming on the brakes to tame price increases.
Everyone wants to buy low and sell high.  What they often forget in that equation is that in order to buy low, they typically have to take on a tremendous amount of risk.   The Brazil ETF represents a tremendous opportunity but also a very high degree of the following types of risk: economic, inflationary and political.  

Only take a position in the EWZ if you can lose every penny you in invest in the position.  It could all go to hell tomorrow.

Stock prices don't lead corporate profits - it's the other way around

 - by New Deal democrat

I've been saying this for several years, and the relative performance of corporate profits and stocks in the last year has certainly borne this out.  My Q1 update is up at .

Bonddad Monday Linkfest

We'll be doing our regular Monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

EU Industrial Prices

UK Construction Activity

Sunday, April 3, 2016