Weekly Indicators: a midsummer respite edition

 - by New Deal democrat

Monthly data reported in the last week included a 5 month high in the Michigan consumer confidence index. Almost all of this was due to the present conditions sub-index, while expectations for the future, a component of the LEI, gained only slightly. Durable goods were up, but only due to transportation. New home sales were up. Existing home sales were down.

Let's start this week's look at the high frequency weekly indicators again by looking at the Oil choke collar:

Oil prices and usage

• Oil $104.70 down -$3.35 w/w


• Gas $3.68 up +0.04 w/w


• Usage 4 week average YoY up +3.1%

The price of Oil retreated from its 52 week high. The price of a gallon of gas should follow (and already is on GasBuddy). The 4 week average for gas usage was, for the third time in a long time, up YoY.

Interest rates and credit spreads

•  5.29% BAA corporate bonds down -0.12%


• 2.54% 10 year treasury bonds down -0.10%


• 2.75% credit spread between corporates and treasuries down -0.02%

Interest rates for corporate bonds had been falling since being just above 6% in January 2011, hitting a low of 4.46% in November 2012. Treasuries previously were at a 2.4% high in late 2011, falling to a low of 1.47% in July 2012, but remain back above that high, although they have backed off the recent new high. Spreads have varied between a high over 3.4% in June 2011 to a low of 2.73% in October 2012, and are very close to that low again.

Housing metrics

Mortgage applications from the Mortgage Bankers Association:

• -2% w/w purchase applications


• +6% YoY purchase applications


• -1% w/w refinance applications

Refinancing applications have decreased sharply in the last 9 weeks due to higher interest rates to a two year low. Purchase applications have also declined from thier multiyear highs in April, and this week were again only slightly positive YoY.

Housing prices

• YoY this week +8.5%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase remained close to its 6 year record.

Real estate loans, from the FRB H8 report:

• +0.3% w/w


• +0.5% YoY


• +2.4% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have completely stalled.

Money supply

M1

• +1.3% w/w


• +0.8% m/m


• +7.1% YoY Real M1

M2

• +0.5% w/w


• +0.8% m/m


• +5.0% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and eased off thereafter. Earlier this year it increased again but has backed off its highs significantly.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It increased slightly in the first few months of this year and has generally stabilized since, although it has declined slightly in the past few weeks.

Employment metrics

The American Staffing Association did not report an update to their Index this week.

Initial jobless claims

•   343,000 up +9,000


•   4 week average 345,250 down -750

Tax Withholding

• $137.4 B for the first 18 days of the month of July vs. $124.7 B last year, up +$12.7 B or +10.2%


• $147.4 B for the last 20 reporting days vs. $134.4 B last year, up +13.0 B or +9.7%

Daily tax withholding has improved to the middle part of its YoY range compared with its YoY average comparison in the last 7 months. Initial claims remain within their recent range of between 325,000 to 375,000, and have flattened out just as they have in the last 3 springs and summers.

Transport

Railroad transport from the AAR

• -3200 carloads down -3.0% YoY


• +6100 carloads or +3.8% ex-coal


• +6900 or +2.8% intermodal units


• -1600 or -0.3% YoY total loads

Shipping transport

• Harpex down -1 to 398


• Baltic Dry Index down -56 to 1082

Rail transport has been both positive and negative YoY in the last several months. This week it was negative once again. The Harpex index had been improving slowly from its January 1 low of 352, but has flattened out in the last 6 weeks. The Baltic Dry Index remained close to its 52 week high. In the larger picture, both the Baltic Dry Index and the Harpex declined sharply since the onset of the recession, and have been in a range near their bottom for about 2 years, but have stopped falling.

Consumer spending

• ICSC +1.4% w/w +2.1% YoY


• Johnson Redbook +3.3% YoY


• Gallup daily consumer spending 14 day average at $91 up $23 YoY

Gallup's YoY comparison was extremely positive this week. The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%. The ICSC has recently been relatively weak, but Johnson Redbook remains close to the high end of its range.

Bank lending rates

• 0.25 TED spread up +0.01% w/w


• 0.186 LIBOR down -0.005% w/w

The TED spread is still near the low end of its 3 year range, although it has risen slightly in the last month.  LIBOR has made another new 3 year low.

JoC ECRI Commodity prices

• up +0.89 to 123.77 w/w


• +5.70 YoY

This was a positive week, with the only outright negatives being mortgage applications, which are still declining, and energy prices, which are high enough to engage the Oil choke collar. YoY S&P 500 earnings also remain slightly negative.

Interest rates have subsided somewhat from their recent highs, and spreads are near 52 week lows. Other positives include bank rates, money supply, house prices, and commodities. Consumer spending is extremely positive as measured by Gallup, very positive as measured by Johnson Redbook, but only weakly positive as measured by the ICSC.

Neutrals to slight positives include real estate loans, jobless claims, withholding taxes paid, and shipping rates.

This week saw a respite in the recent negative turn in the long leading indicators of interest rates and mortgages, as well as a decline in the oil price spike. Short leading and coincident indicators remain positive.

Have a nice weekend.

Weekend Weimar, Beagle and Pit Bull

I'll be back on Monday; NDD will be here over the weekend.

China and Declinging Commodity Prices

The following graph is from the Financial Times:

China's export led manufacturing drive has been a boon to natural resourc companies and countries that are natural resource exporters (Australia, Canada and South America).  With China slowing, all of the countries will see a slowdown.  Consider the commodity ETFs from this mornings report on deflation; with the exception of oil, all are moving lower.

And it appears the slowdown is becoming a trend.  Consider this from the latest HSBC manufacturing report:

Financials Reassert Leadership Role

From the Financial Times:

A stark shift in investor sentiment in global equity markets has accelerated this year with a widening gulf between the market value of big US banks and commodity companies in emerging markets.

Five years ago, just ahead of the collapse of Lehman Brothers investment bank, the market capitalisation of US banks fell below the value of energy, materials and mining companies from the Bric countries – Brazil, Russia, India and China. 

The switch appeared to highlight a shift in global economic power and the rise of fast-growing economies beyond North America and western Europe.

But now investor sentiment has flipped again. At the end of last week the market capitalisation of US banks – which exceed $1tn for the first time since November 2007 – was more than twice that of Bric energy and material companies, which were valued at $432bn, according to calculations by the Financial Times.

Central to the economic growth model of the early 2000s was the South South trade: southern hemisphere countries with lots of raw materials to export sold massive quantities to China.  Now that China is slowing, that trend is far smaller.

This relationship is really apparent in the following chart that shows the relationship between the XLBx (basic materials ETF) and the XLFs (financial ETF):

The financial sector started to overtake basic materials at the beginning of the second quarter.

How Much Damage Will Rising Rates Do To the Housing Recovery?

From Marketwatch:

Even a spike in mortgage costs since late spring — interest rates have jumped nearly a full percentage point — doesn’t appear to have stanched the flow of would-be buyers. It’s possible some buyers moved up their purchases to lock in attractive rates before the rose, analysts say

Housing has been one bright spot in the US economy over the last year, as sales are now in uptrends for both new and existing homes.  However, over the last few months we've seen a drop in bond prices (and a corresponding increase in bond yields).  Consider this chart of the TLT -- the long end of the Treasury market:

Prices have fallen through the 113/114 price level which was providing short term support.  Now prices are in the 106-110 level and appear to be finding a short-term bottom.  There's an uptick in momentum and a newly positive CMF implying at least a stabilization.  In addition, consider the yield on the 10 year is now fluctuating around 2.5%, which isn't a bad rate of return in a low inflation environment.  Put another way, I think we've seen the big bump up in rates that would be expected after the recent Fed announcement regarding tapering its bond buying program.

However, consider this scenario.  Interest rates are clearly rising.  Rate increases will be contained to a certain extent as purchasers such as foreign central banks re-balance their portfolios to take into account the rising rate scenario.  But make no mistake; rates are clearly moving higher.  At the same time, US unemployment is still 7.6%, meaning there is little to no upward wage pressure.  This explains why median incomes have been stagnant for the last 10 years.  At the same time, we've seen a recent spike in oil prices that are also eating into incomes.  And then there is the increase in the median price of new homes:

At some point the combination of rising rates, higher oil prices, stagnant incomes and higher home prices may start to slow home sales. 

Slowing Global Economy Slowing International Exports

The Canadian economy has been hit over the last two quarters by slowing global demand.  The blue part of each quarter's section represents net exports, which have decreased the last two quarters.  These drops in growth coincide with a drop in GDP to just over 1%.

The export situation has been dropping for the last three years.

Singapore continues to see a drop in exports:

Singapore’s exports in June extended the longest run of declines since the global financial crisis, suggesting economic growth last quarter may have been less than the government initially estimated.

Non-oil domestic exports slid 8.8 percent from a year earlier, falling for a fifth month, the trade promotion agency said in a statement today. The median of 17 estimates in a Bloomberg News survey was for a 5.8 percent drop.

Here's a chart of exports from the latest exports release:

As I've noted before, a big reason for this slowdown is a slowing global economy; the EU is in a depression and China is re-balancing its economy.


Taiwan shares the same problem:

June export orders declined 3.5 per cent year on year, weighed down by weak demand from Asia and Europe. Sales to China alone dropped 1.9 per cent, while sales to the broader Asian region fell 3.8 per cent. The 10.4 per cent drop in orders from Europe accelerated the 0.4 per cent contraction seen in May. 

And this is a reason for the overall slowdown we've seen and a primary reason for the drop in the IMF's global forecast:

The global economy is growing more slowly than expected, with risks to that growth increasing especially in emerging markets, says the IMF in an update to its World Economic Outlook (WEO). Global growth is now projected at 3.1 for 2013 and 3.8 percent for 2014, a downward revision of ¼ percentage point each year compared with the forecasts in the April 2013 WEO.

Global growth increased only slightly in the first quarter of 2013, instead of accelerating further as expected at the time of the April 2013 WEO. The underperformance was due to continuing growth disappointments in major emerging market economies, a deeper recession in the euro area, and a slower U.S. expansion than expected. By contrast, growth was stronger than expected in Japan.

Looking ahead, the IMF expects the brakes behind the recent underperformance to ease, but only gradually. Growth in the United States is forecast to rise to rise from 1¾ percent in 2013 to 2¾ percent in 2014, as fiscal consolidation slows and private demand remains solid. In Japan, growth in 2013 is now expected to be 2 percent, up ½ percent from the last WEO, reflecting the boost to confidence and private demand from recent accommodative policies. The euro area is forecast to remain in recession in 2013 before growing again in 2014. Activity in the region continues to suffer from the combined effects of low demand, depressed confidence, financial market fragmentation, weak balance sheets, and fiscal consolidation.

Growth in emerging market and developing economies is expected to moderate to 5 percent in 2013 and about 5½ percent in 2014, some ¼ percentage point lower than projected in the April 2013 WEO. The weaker prospects reflect, to varying degrees, infrastructure bottlenecks and other capacity constraints, lower export growth, lower commodity prices, financial stability concerns, and, in some cases, weaker monetary policy support. In China, growth will average 7¾ percent in 2013–14, ¼ and ½ percentage point lower in 2013 and 2014, respectively, than in the April 2013 forecast.

Turkey Raises Key Rates 75 Basis Points To Stem Currency Slide And Slow Inflation

Count turkey as another developing country that has inflation problems:

Recently, several developments have affected inflation adversely. Surging unprocessed food prices, rising oil prices, and the increased exchange rate volatility may continue to have adverse impact on inflation in the short term. Although the Committee sees these developments as temporary to a large extent, a measured monetary tightening is deemed necessary in order to contain a deterioration in the pricing behavior.

In order to support the price and financial stability, the Committee has decided to raise the upper bound of the interest rate corridor. Cautious stance will be maintained until the inflation outlook is in line with the medium term targets. In this respect, additional monetary tightening will be implemented when necessary.
 
Due to ongoing uncertainties regarding the global economy and the volatility in capital flows, the Committee has decided to increase the flexibility of the liquidity management. To this end, developments regarding price stability and financial stability will be closely monitored and necessary adjustments will be made in the composition of Turkish lira liquidity provided by the Central Bank.

After moderating last fall and this spring, year over year rate of change in both the PPI and CPI has jumped in its most recent reading.

Increasing rates makes it more attractive to hold deposits and financial resources in Turkey, thereby increasing (hopefully) the stability of the country.

The Turkish ETF broke its upward trend (the red line), falling from 75.92 to 53.71 for a drop of about 30%.  Since then, prices have been fluctuating between the 38.2% and 61.8% Fib level, while also getting resistance from the 200 day EMA.

Deflation Is The Real Risk To the US Economy

The following is from Bernanke's speech to Congress last week:

Meanwhile, consumer price inflation has been running below the Committee's longer-run objective of 2 percent. The price index for personal consumption expenditures rose only 1 percent over the year ending in May. This softness reflects in part some factors that are likely to be transitory. Moreover, measures of longer-term inflation expectations have generally remained stable, which should help move inflation back up toward 2 percent. However, the Committee is certainly aware that very low inflation poses risks to economic performance--for example, by raising the real cost of capital investment--and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2 percent objective over time. 

Over the last few months, the hyper-inflation calls of many have gone by the wayside as more and more evidence emerges that deflation may be the real potential problem we are facing.

Let's look at the data.

Total CPI has been running below 2% for most of the last year.

Core CPI's YOY rate has been declining since early 2012

Both the year over year percentage change in PCE and core PCE expenditures have been decreasing since mid-2011 (total) and early 2012 (core).

Perhaps most importantly, gold (which I use as a proxy for inflation expectations among traders) has dropped from very high level.  

And where would potential inflation come from?  Overall demand is low.  The US unemployment rate is still over 7% leading to low wage growth.  This prevents demand pull inflation from occurring.  Capacity utilization is at 77.8%, indicating factories have plenty of ability to ramp up current production to absorb increased demand.

Internationally, China is slowing and shifting to an economic model more focused on domestic demand.  That means the upward pressure on commodity prices doesn't exist in the same rate.  The EU is still in a depression, lowering demand from the second largest economic block in the world; the developing world is slowing  in tandem with China.

Overall commodity prices have been dropping consistently across asset classes.  Consider the following ETF charts:

Most of the agricultural complex has been dropping since 2012.  Grains (top chart) have been dropping since mid-2012 and softs (bottom chart) have been dropping since early 2011.

Copper is at important technical levels on the low side.

Oil is the one commodity that runs counter to this thesis.  However, it's recent rise has occurred in the summer (and therefore in the "summer driving season) and was originally caused by the political situation in Egypt. More importantly, as oil's price increase the oil choke collar tightens around the US economy, slowing growth and therefore inflationary pressure.

Commodity prices are declining, save for oil.  And oil's price increase will eventually slow growth decreasing inflationary pressure.  Unemployment is still too high to lead to meaningful wage increases and capacity utilization can still increase to absorb price pressures.  In this environment, inflation just isn't a major problem.

The long leading indicators - an update

- by New Deal democrat

In view of the recent interest rate spike, now is a good time to review the status of the long leading indicators, which typcially forecast the economy more than 12 months in advance. Last month I wrote that a 1% spike in interest rates was necessary but not sufficient to signal recession. At the time I considered adding housing permits, but I didn't. For a good reason: housing permits don't add much information to the signal given by interest rates.

Here's two graphs, split up from 1964 to 1983, and 1984 to the present. Both show the YoY% change in interest rates (red) and housing permits (blue):

OK, they're squiggles. But the important point is they are esssentially mirror images of one another. When interest rates go up 1% or more, YoY housing permits go down and even turn negative. Literally the only exception to this pattern was 2006-09 when the housing bust presaged the deflationary great recession, so interest rates went down as well. But notice that there are a number of occasions (9 to be exact) when interest rates increased, and housing permits decreased, but no recession occurred: 1966, 1968, 1972, 1978, 1984, 1987, 1994, 1996, and 2004.

Put another way, the sudden softness in housing permits and starts in June may have been a surprise in their quickness, but are an expected result of the interest rate increase and don't give us a lot more information about the economy.

That doesn't end the inquiry, because a third long indicator, corporate profits, looks like it is stalling. The actual series used has only been updated through the first quarter, but Barron's keeps track weekly of reported S&P 500 earnings. Here's what the 4 quarter trailing earnings look iike:

Corporate earnings, as measured by the S&P, have actually turned negative YoY. That doesn't mean that corporate profits as a whole have turned negative, and of course not all second quarter earnings are in. But here's what happens to recession risk when we add in corporate profits (green), again in the first graph from 1964-83, and in the second from 1984 to the present [note I've changed the scale for corporate profit YoY% changes during the 1984-2001 period, just to make them more visible. The change doesn't affect direction at all]:

OK, even more squiggles. But here's what you need to know: when we add in corporate profits as an indicator, all but two of the false positives for recession drop out, leaving only 1966 and 1984. In both cases, by the way, the economy came close to going into recession, but didn't.

Look to the most recent readings: while interest rates are up over 1% YoY, housing permits haven't quite yet turned negative YoY, and corporate profits after taxes are still slightly positive.

Finally, in the past real M2 has had to be less than +2.5% YoY to signal a recession in the near future. We're not close to crossing that threshhold. The graph below shows all four long leading indicators. Real M2 YoY is in red, and adjusted so that a reading of below 100 means real M2 has grown less than +2.5% YoY. Note that the reading remains above that point. The other three long leading indicators are normed to 100 in June 2009. Interest rates are inverted so that an increase in rates reads as a decrease in level:

Note that we actually had a small but actual downturn in 3 of the 4 long leading indicators (permits, corporate profits, and real M2) in parts of 2010 and in early 2011. Doubtless this was one of the things leading to ECRI's blown recession call almost two years ago. As of now, we don't have even that synchronized downturn.

To summarize: interest rates have risen sufficiently to cross a warning threshhold, but housing permits are still positive YoY (although I strongly suspect they'll turn negative within a few months if interest rates remain at their recent elevations). Corporate profits are also on the verge of crossing a negative threshold, but aren't there quite yet. Real money supply is still significantly positive.

Oil Still At Higher Levels; How Long Until The Oil Choke Collar Slows the Economy?

The daily chart of oil shows that the 98-99 price level held for five different advances this year. However, with the Egypt situation prices finally moved through resistance to hit the 108 level.  Also note that inventories have taken a sharp dive over the last few weeks:

The weekly chart really shows the new key levels.  The 110 and 114 price level are now key resistance ares for the market.

Oil is the only commodity market that is showing any meaningful price appreciation right now.

In case you were wondering, here's a chart of the relationship between oil prices and gas prices.  I've reduced both to a scale 100 to show the very tight relationship.

Some Ugly Economic Charts For Detroit

Last week's Detroit bankruptcy got me thinking about what the economy for that city looks like.  Thankfully, the FRED data system has some very interesting data points to consider.

This is the one I found most interesting: the resident population of Wayne County where Detroit is located.  Since 1970 the region has seen a steady decline.  We see the first big drop occurring in the 1970s as the population dropped from a little under 2.7 million to about 2.25 million.  There is slight attrition in the 1980s and 1990s where we see a decrease of about 300,000 (about 2.2 million to 1.9 million).  It's really the last 10 years that show the sharpest decline, as the total population fell from about 1.950 million to 1.8 million.

There is simply no way for a region to survive this kind of population attrition and still have a meaningful economic environment.  Consider the above chart with this from the today's NY Times:

Many retirees expressed a feeling of powerlessness, a sense that they stand to lose the benefits they worked a lifetime for because of things beyond their control. Motor City has lost more than a million residents over the last six decades. When it shrank its work force, it left fewer current workers to contribute to pension funds that still had to pay benefits that were earned by large numbers of older retirees who had served Detroit when it was a bigger city. 

I also found this really interesting.  The unemployment rate was low during the 1990s.  However, during the first expansion of the 2000s unemployment was still high, fluctuating between 7.5% and 10%.  We see a huge jump to 17.5% at the height of the last recession.  Now the rate is 10% -- which is about 2.5% higher than the national average.

Notice the drop in non-farm payrolls that occurred in the previous expansion: we see a drop from about 2.1 million to 1.7 million.  Now we see a rebound to about half of the previous level.   Just as importantly, that pace of creation as been flat for about the last year.

During the early 2000s when the economy was expanding, Detroit lost over 150,000 manufacturing jobs.  That's a mammoth number.  And the rebound has been tiny compared to the fall.

As a result of the huge population outflow and drop in overall jobs, we see a major drop in housing starts.  Remember -- housing starts are a big component of most economic expansions, meaning this drop is very important.

These charts only tell part of the story.  But they are still fascinating to consider.

Market/Economic Analysis: US

Last week the Fed released the Beige Book, which contained this summation of the economy:

Reports from the twelve Federal Reserve Districts indicate that overall economic activity continued to increase at a modest to moderate pace since the previous survey. Manufacturing expanded in most Districts since the previous report, with many Districts reporting increases in new orders, shipments, or production. Most Districts noted that overall consumer spending and auto sales increased during the reporting period. Activity in a wide variety of nonfinancial services was stable or increased in most reporting Districts. Transportation was stable or increased in several Districts. Tourism remained strong in some reporting Districts, although several Districts noted softness from bad weather. Residential real estate and construction activity increased at a moderate to strong pace in all reporting Districts. Commercial real estate market conditions and construction continued to improve across the Districts. Banking conditions generally improved across the Districts. Credit quality improved, while credit standards remained largely unchanged. Agricultural conditions were mixed, as weather patterns varied, while extraction was generally stable or increased. 

The overall picture is of an economy growing at a slow but steady pace.  Hardly news around here, but a good summation nonetheless.  Let's take a look at some of the individual pieces of information.

The Good

There were several releases on manufacturing that were positive.  Overall industrial production increased .3%.  This was a welcome development as the last two monthly readings have been disappointing.  Additionally, the Empire State Manufacturing Survey increased to 9.5 -- not a barn burning level, but a slight increase from the previous month.  The reports internals were far more encouraging with new orders and overall production increasing.  The Philly Fed index increased to 19.8, which was the highest reading since March 2011.  sub-indexes also showed noticeable improvement.

The Neutral

Retail sales -- while increasing .4% in nominal terms -- decreased slightly overall.  More importantly, outside of increases in car purchases, other purchases decreased: Receipts at restaurants and bars decreased 1.2 percent in June, the most since February 2008. Sales dropped 2.2 percent at building materials outlets, the most since May 2012. Purchases at department stores fell 1 percent in June, a fifth consecutive decline.

Just as importantly, the Conference Board reported the LEIs were at 0 last month:
“The U.S. LEI was flat in June. Declines in building permits, new orders and stock prices were offset by gains in consumer expectations, initial claims for unemployment insurance, and other financial indicators. However, the LEI’s six-month growth rate remains positive, suggesting the economy will continue expanding through the end of the year.”

Here are the internals in more detail:

Four of the indicators were negative  -- ISM and manufacturers new orders, stock prices and building permits.  Manufacturers new orders for consumer goods were just barely positive while the average workweek of production workers was 0.  Also note in the top graph, worker's hours have been treading water for the last 7 months.  

Housing starts decreased 9.9% and housing permits decreased 7.5%.  However, the real issue here is why is this occurring.  Sober Look at the markets offers this analysis which I think is well worth considering:

There is another issue however that nobody wants to discuss. Anecdotal evidence suggests that the sudden rise in interest rates has spooked some developers who decided to cool things down a bit - at least until there is more certainty around rates and economic growth (we've seen glimpses of this earlier).
There is no question that construction will resume on its upward path, if for no other reason than demographics. The US population is growing at the rate of roughly 2.3 million per year and construction rates are just not keeping up. 

The just is still out on why we saw this drop.  But I don't think the interest rate issue can be ignored.

The bad

Conclusion:  the news this week had some important problems.  The 0 reading on the LEIs is pretty concerning, as these numbers have a very good predictive history.  The drop in housing starts and permits is also potentially problematic.  Yes, it is one month worth of data which means we shouldn't read too much into it.  But it's also occurring during a period of rising rates and slowing retail sales which is concerning and bears further watching.  

Let's turn to the markets:

As I pointed out last week, the recent rally is composed of inter-day moves (see bottom daily chart)but very little intra-day movement (see the top 30-minute chart).  Part of the reason for this is the timing; in the summer most traders take vacations, so trading desks aren't nearly as active.  The lower volume readings on the lower chart show this in more detail.   

However, a higher move is likely at this point largely because of the huge money inflow into the market:

Some $19.7bn was invested in global equity funds in the past week, the most for six months, while $700m was pulled from bond funds, according to figures from EPFR, which tracks mutual funds and exchange traded fund flows.
The $17.5bn flowing into US equity funds was the most since June 2008. Around $6.5bn of this went into State Street Global Advisors’ popular “Spider” ETF, which tracks the S&P 500 index.

It appears the treasury market has found a bottom and is consolidating losses in the 100.5-102.5 range.  On the daily chart (lower chart) we see a rising MACD (even though it's still in negative territory) and a rising 10 day EMA.  The 30 minute chart (top chart) shows that after bottoming in the around 101, prices rallied to the 102.65 level.  Then we see a second drop to 101.5 only to rally again to the current 102.5 area.  As I point out last week, it appears that the 2.5% yield handle is an attractive yield for foreign central banks.

The dollar ETF found support at the 200 day EMA this week.  But it's still in an overall range.

Weekly Indicators: interest rate spike killing housing rebound edition

 - by New Deal democrat

Monthly data reported in the last week included big drops in housing permits and starts. Because permits are an element of the LEI, that came in flat. Retail sales grew 0.4%, but consumer inflation was up 0.5% due mainly to gas prices, so real retail sales declined slightly. Industrial production was up, as were both the Philly Fed and the Empire State manufacturing indexes.

Let's start this week's look at the high frequency weekly indicators by looking at the Oil choke collar:

Oil prices and usage

• Oil $108.05 up +$2.10 w/w


• Gas $3.64 up +0.15 w/w


• Usage 4 week average YoY up +2.1%

The price of Oil increased further again this week to a new 52 week high. I am still unable to find any rational reason for this. The price of a gallon of gas rose sharply as a result. The 4 week average for gas usage was, for the second time in a long time, up YoY.

Interest rates and credit spreads

•  5.41% BAA corporate bonds up +0.05%


• 2.64% 10 year treasury bonds up +0.09%


• 2.77% credit spread between corporates and treasuries down -0.04%

Interest rates for corporate bonds had generally been falling since being just above 6% in January 2011, hitting a low of 4.46% in November 2012. Treasuries previously were at a 2.4% high in late 2011, falling to a low of 1.47% in July 2012, but have spiked back above that high. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012, and are very close to that low again.

Housing metrics

Mortgage applications from the Mortgage Bankers Association:

• +1% w/w purchase applications


• +5% YoY purchase applications


• -4% w/w refinance applications

Refinancing applications have decreased sharply in the last 8 weeks due to higher interest rates to a two year low. Purchase applications have also declined from thier multiyear highs in April, and this week were again only slightly positive YoY.

Housing prices

• YoY this week +8.5%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase remained close to its 6 year record.

Real estate loans, from the FRB H8 report:

• -0.1% w/w


• +0.2% YoY


• +2.1% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have completely stalled.

Money supply

M1

• -0.7% w/w


• -1.6% m/m


• +8.1% YoY Real M1

M2

• -0.1% w/w


• +0.6% m/m


• +5.0% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and eased off thereafter. Earlier this year it increased again but has backed off its highs significantly.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It increased slightly in the first few months of this year and has generally stabilized since.

Employment metrics

American Staffing Association Index

• 88 down -6 w/w, down -0.3% YoY

Initial jobless claims

•   334,000 down -26,000


•   4 week average 346,000 down -5,750

Tax Withholding

• $106.6 B for the first 13 days of the month of July vs. $97.5 B last year, up +$9.1 B or +9.3%


• $147.6 B for the last 20 reporting days vs. $135.0 B last year, up +12.6 B or +9.3%

The ASA deteriorated to being flat or negative compared with last year in the last several months. This week's decline was seasonal in nature due to July 4. Daily tax withholding remained in the lower part of its YoY range compared with its YoY average comparison in the last 6 months. Initial claims remain within their recent range of between 325,000 to 375,000, and have flattened out just as they have in the last 3 springs and summers.

Transport

Railroad transport from the AAR

• -8600 carloads down -3.1% YoY


• +800 carloads or +0.5% ex-coal


• +2400 or +0.9% intermodal units


• -6900 or -1.3% YoY total loads

Shipping transport

• Harpex flat at 399


• Baltic Dry Index down -11 to 1138

Rail transport has been both positive and negative YoY in the last several months. This week it was negative once again. The Harpex index had been improving slowly from its January 1 low of 352, but has flattened out in the last 5 weeks. The Baltic Dry Index remained close to its 52 week high.

Consumer spending

• ICSC -1.1% w/w +1.7% YoY


• Johnson Redbook +3.0% YoY


• Gallup daily consumer spending 14 day average at $89 up $22 YoY

Gallup's YoY comparisons are still very positive. The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%. The ICSC has recently been relatively weak, but Johnson Redbook remains close to the high end of its range.

Bank lending rates

• 0.24 TED spread unchanged w/w


• 0.191 LIBOR down -0.001% w/w

The TED spread is still near the low end of its 3 year range.  LIBOR rose remains slightly above the new 3 year low it established four weeks ago.

JoC ECRI Commodity prices

• down -0.25 to 122.88 w/w


• +3.50 YoY

The sharp rise in interest rates and the sharp decrease in mortgage refinancing have now been joined by a big spike in Oil prices, which is now being felt at the pump. The decline in housing permits and starts show that it is already being impacted. Purchase mortgages have also backed off their earlier improvement. Temporary jobs are also negative YoY again, as are railroad shipments.

Positives include consumer spending, jobless claims, house prices, and bank and money rates. Spreads between corporate bonds and treasuries are also near their lows.

Once again the story remains that coincident indicators are holding up, while the long leading indicators of interest rates, housing, and corporate earnings have turned negative. The only long leading indicator still positive is Real M2. The Oil price spike and continuing sequestration certainly aren't helping.

Have a nice weekend.

OK -- Who's the Joker?

For reasons unknown, I am now receiving direct mail pieces from Judicial Watch and the Heritage Foundation.  In fact, the Heritage Foundation has sent me a membership card to "try it on for size. "

Considering that I basically think the Heritage Foundation is a joke (at best), I can only conclude that someone has signed me up for this as a joke.

So -- who's the joker?

/snark

Have a good weekend.  

Failed Narratives: a reply to Barry Ritholtz and Noah Smith

- by New Deal democrat

Barry Ritholtz has a contemplative piece up at The Big Picture called The Narrative Fails. His thesis, borrowed from Cullen Roche, is that:

The economy continues to do okay, the stock market is hitting all-time highs every day, real estate is back on the up and up, interest rates remain very low by historical terms, the net worth of Americans is back at all-time highs, we’ve just dragged ourselves out of the worst recession in 80 years, but people are still upset about a lot of things . . . I have a feeling that there’s more to this general unhappiness than meets the eye. And I think a lot of people are mad because the fear case has totally lost out at this point.

I believe Barry is exactly right - as far as the stock market goes. The anger over any positive data is apparent in the comment section of almost all big economic blogs. Certainly if you click on almost any piece at Business Insider and start reading the comments, the stark raving outrage at any suggestion that the world is not immediately going to hell on a one way ticket is endemic.

So Barry is right about the stock market. Doomers who have been predicting crashes and double dips since just past the market bottom in 2009 (and even those who foresightedly got out of the market before late September 2008, but failed to get back in) have missed completely out on the best returns in nearly two decades.

But I think the positive narrative that focuses on stock market returns has also utterly failed. As it happens, this morning I was again pondering the simple fact that while the economy has been making positive strides ever since mid-2009, it hasn't been good enough. On a per capita rather than overall basis, many if not most markers of individual well-being have stalled out, or at least are well below their pre-recession peaks.

For example, I've put up a number of posts in the last month digging into the issue of average and median real wages. Average real wages haven't improved since 2009, and median wages are no better than they were in 2007.

That, accounting for population growth, employment hasn't nearly returned to its 2007 peak, is well known:

Here's another graph, taken from Doug Short's site, comparing how 4 coincident indicators of the economy: real retail sales, industrial production, employment and real income, have fared since before the recession:

Real sales have made up all of their lost ground, and industrial production nearly so. But employment has only made up about 3/4 of its losses - and that not on a population adjusted basis. And real income still looks very poor, even though it has improved somewhat.

So if the Doomer narrative has failed, so has any notion that a booming stock market in any way reflects the daily tribulations of several hundred million Americans.

------------

And speaking of Failed Narratives, Noah Smith writes today about How normal people see Macroeconomics, saying that "people understand arguments for redistribution but don't understand efficiency arguments," and elaborates that:

observation[s] ... from long experience and countless interactions with friends and relatives and strangers in cafes, blog commenters and op-ed writers and EconoTrolls. Among the things I've noticed are:

1. Normal people talk about economic "schools" much much more than do economists.

2. When normal people talk about the consequences of ... policy..., they often talk about the impact on the rich and poor, the benefits to big banks, and the "fairness" of the policies. In contrast, economists rarely talk about these things.

In a certain sense, the normal people's approach makes more sense than that of the economists.... [T]he impact of any redistribution of our titanic wealth will be enormous. Economists usually try to be impartial, shrugging and saying "Rent is rent!" when confronted with questions of distribution, or pooh-poohing welfare analysis as the province of philosphers and dorm-room discussions. They focus on efficiency because a Pareto improvement is something that everyone can get behind (in fact, that's how it's defined).

And only about 10 comments down, says:

economists usually assume complete markets, so that Pareto efficiency can be defined in terms of money.

Thereby demonstrating exactly why normal people do not share the narrative that he says mosts macroeconomists share.

P.S.: Smith ends the comment above by saying, "I don't much like this approach."

Good.

Chile and Peru Keep Rates Steady

From the Chilean Central Bank:

In its monthly monetary policy meeting, the Board of the Central Bank of Chile decided to maintain the monetary policy interest rate at 5% (annual).

International financial conditions tightened, especially those facing emerging economies, mainly responding to signs of an earlier withdrawal of the monetary stimulus in the United States. Recent indicators for the U.S. economy are positive and point to a gradual recovery. The Eurozone continues in recession while growth forecasts for China have been revised downward, as have those for other emerging economies. The prices of foodstuffs and metals, including copper, receded in recent weeks, while fuel prices rose. The dollar showed a widespread appreciation in international markets.
 
Domestically, incoming information reveals an ongoing slowdown of output and demand, especially in investment. The labor market is still tight. Consumption has remained strong, but the evolution of credit conditions and confidence surveys suggest this variable will lose momentum. Headline inflation approached the tolerance range, as expected, while core measures remain close to 1% y-o-y. Inflation expectations over the policy horizon remain around the target.

From the Peruvian Central Bank:

1. The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.

This decision is based on the fact that the rate of inflation is within the target range in a context of economic growth in the country close to the economy’s potential level of growth amid international financial uncertainty.

The Board oversees the inflation forecasts and inflation determinants to consider future adjustments in monetary policy instruments.

2. Inflation in June recorded a rate of 0.26 percent due mainly to the rise in the prices of some food products and fuels. Inflation in the last 12 months rose from 2.46 percent in May to 2.77 percent in June. Core inflation showed a rate of 0.26 percent (3.38 percent in the last 12 months), and inflation excluding food and energy showed a rate of 0.16 percent (2.35 percent in the last 12 months).
 
Inflation is expected to converge to the center of the target range in the next months due to the improvement observed in the conditions of food supply, to a pace of growth of economic activity close to the economy’s level of potential output, and to inflation expectations anchored to the target range.

3. Current and advanced indicators of activity show that the growth of the Peruvian economy is close to its long-term sustainable level of growth, even though the indicators associated with the external market still show a weak performance that affects the prices and volumes of export products.

The Chilean ETF broke the strong support at the 58 price level in late May.   Since the the market has continued lower, bottoming on stronger volume in late June.  Currently the market is forming a symmetrical triangle.  While the MACD is rising, it's still in negative territory and the CMF has just turned positive.  However, the overall chart is still bearish and a move higher would have very strong upside resistance.

The weekly Peruvian chart shows that prices have been dropping since the beginning of the year and are no approaching a three year low.   The chart is extremely bearish: the downward trend has been in place for about half a year and we see strong bars printed in the sell-off. 

The Fiscal Drag of the Sequester

First, the Fed has a great summary of the economy here.  It's included as part of their semi-annual presentation to Congress.

Secondly, the budget deficit is declining in a meaningful way.  

These fiscal policy changes--along with the ongoing economic recovery and positive net payments to the Treasury by Fannie Mae and Freddie Mac--have resulted in a narrower federal deficit this year. Nominal outlays have declined substantially as a share of GDP since their peak during the previous recession, and tax receipts have moved up to about 17 percent of GDP, their highest level since the recession (figure 12). As a result, the deficit in the federal unified budget fell to about $500 billion over the first nine months of the current fiscal year, almost $400 billion less than over the same period a year earlier. Accordingly, the Congressional Budget Office projects that the budget deficit for fiscal year 2013 as a whole will be 4 percent of GDP, markedly narrower than the deficit of 7 percent of GDP in fiscal 2012. In addition, as shown in box figure A, the deficit is projected to narrow further over the next couple of years in light of ongoing policy actions and continued improvement in the economy. Despite the substantial decline in the deficit, federal debt held by the public has continued to rise and stood at 75 percent of nominal GDP in the first quarter of 2013 (figure 13). 

It's very interesting that not one of the supposed deficit hawks has even reported on this development.

Third, the sequester is hurting growth (as most of us in the geek world said it would; see links above):

Fiscal policy at the federal level has tightened significantly this year. As discussed in the box "Economic Effects of Federal Fiscal Policy," fiscal policy changes--including the expiration of the payroll tax cut, the enactment of other tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations--are estimated, collectively, to be exerting a substantial drag on economic activity this year. Even prior to the bulk of the spending cuts associated with the sequestration that started in March, total real federal purchases contracted at an annual rate of nearly 9 percent in the first quarter, reflecting primarily a significant decline in defense spending (figure 11). The sequestration will induce further reductions in real federal expenditures over the next few quarters. For example, many federal agencies have announced plans to furlough workers, especially in the third quarter. However, considerable uncertainty continues to surround the timing of these effects.

Market/Economic Analysis: Brazil

Last Wednesday, the Brazilian central bank raised the interest rate 50 basis points to 8.5%:

Continuing the adjustment process of the basic interest rate, the Copom unanimously decided to increase the Selic rate to 8.50 percent, without bias.

The Committee evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year.

This is the third interest rate increase over the last three meetings, as shown in this chart:

The primary reason for the increase is inflation has stayed stubbornly high yet and has yet to decrease as a result of the recent interest rate increase.

Remember these rate increases are occurring in an environment of slowing economic growth, indicating the central bank is far more interested  and concerned in inflation than growth right now.  More importantly, this is a very negative development, as the central bank must essentially work against national interest in the short run.

Let's turn to the Brazilian charts, starting with the an ETF of the stock market:

 

The weekly chart really highlights the negative position of the market.  There was strong support in the 46 price area from levels established in mid and late 2012.  Prices moved through these levels -- along with the trend line connecting the mid and late 2012 lows -- earlier this year as it became apparent the Brazilian economy was slowing.  For the last year, the 200 week EMA has provided technical resistance.  The MACD and CMF are now both in negative territory.  The only good news on the chart is the 42.5 level seems to be holding.  However, any rebound from this level will most likely be technical in nature until we see more fundamental developments that presage growth.

The real has a very similar story on the daily chart.  The 18 and mid-18 price level was providing strong technical support from previously  established price levels.  However, recent price action broke these levels, sending prices lower and below the 200 day EMA.  While the MACD has turned upward, it's still in negative territory and the CMF is negative as well.