Saturday, February 2, 2013

Weekly Indicators: austerity bites edition

- by New Deal democrat

In the rear view mirror, 2012 4th quarter GDP unexpectedly declined -0.1%, due mainly to the largest cutback in military spending in 40 years, plus inventory reductions. November Case-Shiller house prices increased. December monthly data included a big increase in durable goods spending and personal income, and an increase in construction spending and personal spending. January auto sales were virtually unchanged from November and December. Both the Chicago and PMI January manufacturing indexes surprised to the upside. One measure of consumer confidence rose and the other declined in January.

This week appears to give the first indication that tax increases may be affecting the economy. So Let's start this look at the high frequency weekly indicators by checking what is happening with tax withholding:

Employment metrics
Daily Treasury Statement tax withholding
  •  $127.6 B (adjusted -13.1% for 2013 payroll tax withholding changes) vs. $149.0 B, -14.4% YoY last 20 days

  •  $149.5 B (adjusted -13.1% for 2013 payroll tax withholding changes) vs. $158.7 B, -5.8% YoY for all of January
Initial jobless claims
  •   368,000 up 38,000

  •   4 week average 352,000 up 250
American Staffing Association Index
  • unchanged at 89 w/w up 3.5% YoY
Employment metrics were poor this week. Initial claims increased back into their 2012 range this week. In the second half of 2012 the ASA index's performance compared with 2011 declined significantly, although the absolute index was higher. This week, however, the Index declined slightly compared with 2007 and remains below 2008. Tax withholding was the worst since the last recessioin after being particularly weak for two weeks in a row. Since the 1st of each month tends to be a very big day for payment of these taxes, the 20 day average is something of an aberaation this week. But the monthly January reading is not so affected. Thus the YoY decline is a real concern. Please note I am adjusting my YoY figures to reflect the increase in personal withholding taxes, and it is possible that the adjustment is off.

Consumer spending
  • ICSC -1.0% w/w +2.0% YoY

  • Johnson Redbook +1.6% YoY

  • Gallup daily consumer spending 14 day average $76 up $12 YoY
Gallup remains significantly positive. The ICSC varied between +1.5% and +4.5% YoY in 2012. This week was close to the bottom end of that range. Johnson Redbook is also in the lower part of its YoY growth range from 2012.

Housing metrics

Housing prices
  • YoY this week. +2.6%
Housing prices bottomed at the end of November 2011 on Housing Tracker, and have averaged an increase of +2.0% to +2.5% YoY for the last year.

Real estate loans, from the FRB H8 report:
  • 0.0% w.w

  •  +2.0% YoY

  • +2.6% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012, and have recently shown somewhat more YoY strength. This week remained near the top of its recent range.

Mortgage applications
  • -2% w/w purchase applications

  • +2% YoY purchase applications

  • -10% w/w refinance applications
Purchase applications have been going sideways for 2 years. This week's reading remained close to the top of that range. Refinancing applications were very high for most of last year with record low mortgage rates, are responding to an increase in rates.

Interest rates and credit spreads
  • +0.03% to 4.72% BAA corporate bonds

  • +0.03% to 1.90% 10 year treasury bonds

  • 0.0% change at 2.82% credit spread between corporates and treasuries
Interest rates for corporate bonds have been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012. Treasuries have fallen from about 2% in late 2011 to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012. This weak was slightly negative, although the YoY changes remain very positive.

Money supply

  • +0.6% w/w

  • +0.9% m/m

  • +10.3% YoY Real M1

  • -0.5% w/w

  • +0.2% m/m

  • +5.7% YoY Real M2
Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since. This week's YoY reading remained above a new low set several weeks ago. Real M2 also made a YoY high of about 10.5% in January 2012. Its subsequent low was 4.5% in August 2012. It weakened this week. Both are still quite positive in absolute terms.

Oil prices and usage
  •  Oil $97.77 up $1.89 w/w

  •   gas $3.34 up $.04 w/w

  • Usage 4 week average YoY +3.0%
Gas prices are increasing seasonally. Unusually for the last year plus, the 4 week average for the second week in a row was positive YoY.


Railroad transport
  •  -18,000 or -6.3% carloads YoY

  • -100 or virtually unchanged carloads ex-coal

  • +3,800 or +1.6% intermodal units

  • -14,200 or -2.7% YoY total loads

  • 10 of 20 types of carloads up YoY, an increase of 1 from last week
Shipping transport
  • Harpex unchanged at 359

  • Baltic Dry Index down 40 to 758
Rail transport has been whipsawing between very positive and very negative readings over the last 2 months. This may well be the aftermath of the dock strikes. That traffic is off YoY even ex-coal, however, is cause for concern. The Harpex index is still near its 3 year low of 352, and the Baltic Dry Index is declining towards its 52 week low from last February.

Bank lending rates
  • 0.240 TED spread down +0.010 w/w

  • 0.2006 LIBOR down -0.0031 w/w
The TED spread is near its 52 week low. LIBOR is again at a new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices
  • up 0.36 to 129.89 w/w

  • +4.40% YoY
The most important issue at the moment is whether the 2% increase in withholding tax rates is having an effect on consumers. We can add to that the issues of the impending austerity of the budget sequestration, and the potential consequences of moving income and spending forward into 2012 from 2013 due to tax increases. This week we got strong evidence for the first time that there is indeed an effect.

Tax withholdings were the weakest in a long time. Rail was weak. Initial jobless claims spiked. Shipping rates are low, although much of that is likely seasonal. Gas prices are rising seasonally. Consumer spending as measured by same store sales are now at or near the weak end of their 2012 YoY comparisons. Consumer confidence is declining precipitously, at least as measured by one survey, although the other shows an improvement.

Continuing positives include the housing market, money supply (although more weakly positive than in the last year or two), bank lending rates, and commodity prices. Gallup consumer spending is still strong. Manufacturing conditions surprisingly improved in January.

If austerity measures emanating from Washington are enough to tip the economy into contraction, the evidence should accumulate in the next few weeks.

Have a nice weekend.

Is the US Economy Moving Into A Higher Growth Phase? Part I; the Positive

I wrote a four part series last week discussing the possibility of a new bull market opening up.  While the technical side of the markets favored the bulls, I was deeply concerned that the overall economic environment was too negative to support a strong move higher.  Here was my conclusion:

To sum up the national and international position, I just don't see strong enough overall growth in any economy to warrant a strong long position right now.  The best reading of the data is that we'll see a stronger second half, with the US housing market providing sufficient domestic stimulus combined with a more settled fiscal situation.  This would also allow the EU to continue strengthening or bottoming. The stronger second half argument leads could lead into the fact that the market is a leading indicator of anticipated future activity -- a fair point as far as it goes, but I just don't see the overall underlying strength to support the rally long term.

Then came Friday's move higher, which led me to question my analysis yet again.  Over the weekend, I realized that my conclusion was based on a macro reading of other world economies, and not the fact that the US being the largest world economy could achieve a level of growth sufficient to propel it beyond the 2% GDP growth rate we've seen for the last few years.  In addition, for the last few years I've been wedded to an analysis that calls for US growth between 0%-2% (an analysis that has been mostly correct).  

So, as a thought exercise, let's look at a few data points that support the idea the US is about to move into a period of higher growth.


If any sector can help to move the economy into a higher gear, it's housing, largely because it provides a tremendous multiplier.  When a house is built, it requires a large amount of raw materials converted into useful items (wood, copper, etc..).  There is also a decent amount of labor involved.  Finally, there is a large amount of durable goods that go into a house (furniture and appliances).  All of these factors add up to a decent multiplier for the macro economy as a whole.

For me, the real story of housing is the low inventory levels we're seeing at the macro level, as shown in the following two charts.

The top chart of new homes inventory shows levels at some of their lowest levels in 40 years, while the lower chart if existing homes shows that levels are now at far more normal levels.  These inventory levels have led to price increases, as shown in the year over year percentage change in the Case Shiller index:

Finally, the low levels of inventory have led to a big increase in new home construction, as shown in the housing starts figures:

Although they are coming off a low level, housing starts have clearly picked up and are rising at a strong clip.

In short, housing still remains a big reason why the US economy may kick into a higher growth rate.

Auto Sales

Sales of cars and light trucks have been in a strong uptrend since the bottom of the recession.

The top chart shows the figures for the last five years.  While we do have some dips in the figure, the overall upward trend is clear.  The longer chart (lower chart) puts the action in overall historical context.  The drop in activity during the Great Recession was the sharpest we've seen since 1980.  But now overall figures are at levels seen with the mid-1990s expansion.

The reason for the importance of auto sales is, like housing, they have a decent multiplier effect on the economy.  There are still a fair number of employees in this industry -- especially in the industrial Midwest -- the the process of making a car still requires a large amount of ancillary activity.


The strongest evidence of a manufacturing resurgence is found in the latest ISM report, issued last week.  

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 53.1 percent, an increase of 2.9 percentage points from December's seasonally adjusted reading of 50.2 percent, indicating expansion in manufacturing for the second consecutive month. The New Orders Index registered 53.3 percent, an increase of 3.6 percent over December's seasonally adjusted reading of 49.7 percent, indicating growth in new orders. Manufacturing is starting out the year on a positive note, with all five of the PMI™'s component indexes — new orders, production, employment, supplier deliveries and inventories — registering above 50 percent in January."

Of the 18 manufacturing industries, 13 are reporting growth in January in the following order: Plastics & Rubber Products; Textile Mills; Furniture & Related Products; Printing & Related Support Activities; Apparel, Leather & Allied Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Fabricated Metal Products; Transportation Equipment; Petroleum & Coal Products; Machinery; Primary Metals; and Food, Beverage & Tobacco Products. The four industries reporting contraction in January are: Nonmetallic Mineral Products; Computer & Electronic Products; Wood Products; and Chemical Products.

Simply put, the report above is very bullish.  It shows a broad path of growth over a variety of internal ISM figures (overall index, new orders, employment, supplier deliveries and inventories) along with a majority of industries growing.

The US report is confirmed by the latest Markit report:

The final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 signalled a strong expansion of the U.S. manufacturing sector at the start of 2013. Moreover, at 55.8, below the earlier flash estimate of 56.1 but higher than that recorded in December (54.0), the PMI signalled the fastest rate of growth in nine months.

Here is a chart of Markit's overall figures:

 When looking for the reasons of the manufacturing increase, consider these points from the latest ISM report:
  • "Fiscal cliff, uncertainty in general and EU economic weakness are factors causing our customers to be very tentative with commitments for product purchases in 2013." (Machinery)
  • "Midwest drought impact will be felt at least through midyear, impacting protein, sweeteners, eggs, oils, emulsifiers, etc." (Food, Beverage & Tobacco Products)
  • "Slowing interest in high-dollar purchases reflects continuing economic uncertainty." (Miscellaneous Manufacturing)
  • "Expenditure and investment are expected to remain high in North America in Q1 and Q2, 2013." (Petroleum & Coal Products)
  • "Housing sales are trending upward in light of overall market uncertainty, translating to improving optimism in appliance market." (Electrical Equipment, Appliances & Components)
  • "Still waiting for reaction to consumer tax increases." (Fabricated Metal Products)
  • "Government spending is very low, probably due to the fiscal cliff and the looming debt ceiling." (Transportation Equipment)
  • "Business is improving." (Furniture & Related Products)
  • "The general theme developing in our industry is that we can move suitable volumes. However, profit margin is elusive." (Wood Products)
  • "Overall production volume decreasing. Decrease is led by decline in exports of 10 percent." (Chemical Products)
The good news in the report is from the housing market.  We see a statement to that effect along with business improvement in furniture and related products and increased orders in wood products.

All three of the above sectors -- housing, autos and manufacturing -- are bedrock components of the economy.  If all three are doing fairly well, the worst that can happen is slow growth.  There is simply too much of a multiplier effect of the combined total for a recession to occur with the above three expanding.

However, this is before we get to the latest and upcoming fiscal follies from the idiots in Washington.  We'll touch on that tomorrow.


Friday, February 1, 2013

Weekend Weimar, Beagle and Pit Bull; In Memorial

As regular readers of this blog know, I usually put up pictures of our dogs on Friday afternoon.  Unfortunately, we lost one of our pups this week,  Scooby Doo.  Words don't come close to expressing how important animals are to me and Mrs. Bondad, so I won't even try.  Instead, I'll just leave you with these pictures or our girl.  She will be missed.

A quick note about the ISM manufacturing report

. - by New Deal democrat

As you can probably tell from my recent posts, I am in a quandary as to whether the increase in payroll taxes plus other government austerity measures are enough to put this country into an actual recession. If anything, my outlook is getting gloomier.

The shame is that, left to itself, it looks like the economy wants to keep growing. Today's ISM manufacturing report of 53.4 is very potent evidence of that. The index has been reported since 1948. Since that time, only once - for the first six months or so of the 1973-74 recession - has the index ever recorded a reading above 53 during a recession.

Interestingly, or ominously, that recession occurred when a strongly growing US economy ran into the brick wall of the Arab oil embargo. So if a recession is starting, you can blame it squarely on ridiculous contractionary austerity coming from Washington, DC.

Europe Still A Mess

Consider these two charts of European Consumer Confidence (top chart) and Business Climate (bottom chart).

These are bearish reports.

Also note that most county's respective PMIs are below 50:

The Financial Times is reporting that EU residents and business leaders are looking at the top chart and saying the "worst is behind us."  From the story:

The European Commission’s “economic sentiment indicator” rose from 87.8 in December to 89.2 as managers predicted that the service and construction sectors would pick up across the 17 countries in the currency bloc. The strongest improvement in sentiment was registered in Germany, the Netherlands and Spain. 
“The third successive, and appreciable, rise in eurozone economic sentiment to be at a seven-month high in January adds to the evidence that eurozone economic activity bottomed out around last October and growth prospects are brightening,” said Howard Archer, economist at IHS Global Insight. 

However, a look at the charts accompanying the report show that various sectors are still printing negative readings (see links above).

Two Warnings From the Last GDP Report

The above graph shows the percentage change in exports (blue) and imports (red) from the preceding quarter.  The drop in exports is obviously related to the global slowdown.  The drop in imports (red) is probably indicative of a drop in consumer demand -- never a good thing.  Also note the drop in imports has occurred for two quarters -- again, not a good development.

Golly Gee, It's Another Mediocre Employment Report

From the BLS:

Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent, the U.S. Bureau of Labor Statistics reported today. Retail trade, construction, health care, and wholesale trade added jobs over the month.

The number of unemployed persons, at 12.3 million, was little changed in January. The unemployment rate was 7.9 percent and has been at or near that level since September 2012. (See table A-1.) (See the note and tables B and C for information about annual population adjustments to the household survey estimates.)

Just like the last few months, we've added some jobs,  but nowhere near enough to make a meaningful dent in long-term unemployment.  Here's a chart from the report:

The unemployment rate has stalled at right below 8% for the last five months.  Put another way, we're treading water.

Here is the hours worked and wage data:

In January, the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours. The manufacturing workweek edged down by 0.1 hour to 40.6 hours, and factory overtime was unchanged at 3.3 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged down by 0.1 hour to 33.6 hours. (See tables B-2 and B-7.) 

Average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $23.78. Over the year, average hourly earnings have risen by 2.1 percent. In January, average hourly earnings of private-sector production and nonsupervisory employees increased by 5 cents to $19.97. (See tables B-3 and B-8.) 

The change in total nonfarm payroll employment for November was revised from +161,000 to +247,000, and the change for December was revised from +155,000 to +196,000. Monthly revisions result from additional reports received from businesses since the last published estimates and the monthly recalculation of seasonal factors. The annual benchmark process also contributed to these revisions.

There's good news and bad news above.  The good news is we see some impressive revisions to November's and December's number.  There is also a decent one month bump in hourly earnings.  The bad news the average workweek for all employees was unchanged while the workweek for manufacturing edged down. 

Finally, we did get the following revisions to last year's data:

Bottom line, nothing has meaningfully changed regarding employment. 

NDD here with my comments. My take is a little darker than Bonddad's, due to some negative numbers in the leading data in the report.

As I typically do, let's first look at the more forward-looking indicators in the report, which tell us where we are likely to go from here.  These contained several negative surprises:

  -  The manufacturing workweek declined 0.1 hour.  This is one of the 10 components of the LEI.  Overtime was flat at 3.3 hours.

  -  8100 temporary jobs were lost.  If anything, these have a positive secular bias.  We've now had two negative months in a row, so this is a cautionary sign.

  -  The number of workers unemployed for 0 - 5 weeks, a more forward looking indicator than initial jobless claims, increased by 90,000. This is the second large increase in a row, and is another cautionary sign.

On the other hand,

  -  Manufacturing added 4000 jobs.

  -  Construction added 28,000 jobs.

Important coincident data includes the index of aggregate hours, which measures the total number of working hours in the economy, which increased 0.1.

Another very important item is that average hourly earnings increased $.04 to $23.78.  They are up 2.1% YoY which is higher than the most recent inflation rate.  In other words, for the first time in 2 years, Joe Sixpack's real, inflation adjusted wages are increasing.  Too bad he just took a 2% cut in take home pay due to the increase in tax withholding.

Other data stayed at trend.  The employment to population ratio was flat at 58.6%.  The broad U-6 measure of unemployed was also flat at 14.4%.  Government shed 9000 jobs.

Finally, the revisions to the 2012 and earlier reports substantially change what was reported previously (although the BLS told us this was coming half a year ago). As of March 2012, the BLS added 422,000 jobs to previous reports. From April to December 2012, another 224,000 jobs were added, including upward revisions of 86,000 to November and 41,000 to December. This means that the total number of jobs added to the economy in 2012 actually exceeded those added in 2011. This makes the jobs recovery since the bottom of the recession in June 2009 significantly better than we thought it had been. But this is in the past.

My bottom line: the picture in the rear view mirror looks substantially better than it did before, thanks to the revisions to 2012 and earlier data.  The coincident data is ok, but not better.  The forward looking leading data for January was negative.

Morning Market Analysis

The Chinese market continues to rally.  The daily chart (top chart) shows that prices broke the support established by the strong rally that started in early December, but consolidated in a sideways move that lasted most of January.  Now prices are again moving higher, as noted by the MACD about to give a buy signal.  The weekly chart (bottom chart) shows prices have clear sailing until the 200 week EMA.

The weekly euro chart shows that prices have moved through the 200 week EMA and the 50% Fib level.  The shorter EMAs are also rising, as is the MACD.

The weekly copper chart has broken through the upper level of one triangle (red lines) pattern but is still contained by the second (blue lines).  Also note the weak MACD reading, negative CMF and jumbled EMA picture.

Thursday, January 31, 2013

Coincident indicators finish 2012 at new highs

. - by New Deal democrat

Despite the common belief that a recession is defined by two consecutive quarters of economic contraction, in fact the official arbiter of business cycles, the NBER, defines it as a pronounced and sustained downturn in production, sales, income, and employment. Measured by that yardstick, and subject to revisions as always, as of now there is no question that there was no recession in 2012. Production, sales, income and employment all finished at their highs for the year.

Here is an update of the graph I ran several weeks ago, in which the four coincident indicators of industrial production (blue), real retail sales (red), real personal income minus transfer receipts (green), and payrolls (orange), are normed to 100 at their previous highs in July:

As you can see, all four have made new highs as of December. In short and simple terms, no recession.

At least one prominent forecasting firm prefers to make use of real manufacturing and trade sales rather than real retail sales. Those were updated through November this morning, and those too made a new high (h/t Doug Short):

But what of yesterday's -0.1% GDP print? If it truly is a one-off negative due to the biggest reduction in military spending in 40 years, then it is meaningless in terms of the state of the underlying economy.

The more interesting, if depressing, question is, what if the 2% reduction in take home pay, plus policy mistakes such as the impending sequestration, cause this quarter to be another, consecutive period of contraction? Then it is at least possible that the NBER will pick December as the peak of business activity, and date any recession from that month.

But unless there are significant downward revisions, that will most certainly not be a vindication of those who said we were entering a recession "now" in September 2011, then most likely in the first quarter of 2012, then by midyear 2012, and then in July 2012.

Dollar Is At Critical Technical Support

The daily dollar chart (top chart) is approaching the 21.6/21.5 level, which is a critical technical support level.  Also note the overall bearishness of the chart: prices are below the 200 day EMA as are all the shorter EMAs, the MACD is is below 0 and declining, the CMF is negative and there was a big volume spike on yesterday's move lower.

The weekly dollar chart (bottom chart) shows more bearishness as well.  Prices are below the 200 week EMA as are the shorter EMAs.  The MACD is below 0, although the CMF just turned positive. 

Oil Creeping Higher -- At What Price Does It Start to Choke Growth?

The daily oil chart shows that oil has been in a rally since early December.  Currently, prices are above the 200 day EMA.  All three shorter EMAs have moved through the 200 day EMA, and all shorter EMAs are rising.  Volume is supportive.  While the CMF is very bullish, the MACD is weakening a bit.

A move through the 98 price level makes 100 the next logical price target.

So -- at what price does oil start to choke off recovery?

Brent just crossed the 115 level, which could slow growth in the EU.

Morning Market Analysis: Is It Time To Turn Bullish? Part IV; the Fundamentals

First, let's review the first three installments of this series.  In the first, I noted that in general the broad averages were in a bullish posture.  However, there are some concerns with market breadth that indicate the market rally is probably overbought at these levels.  In the second, I noted that the five largest ETFs were all very strong.  In the third, I noted that money was already flowing out of the corporate bond market, but that the Treasury markets were still hanging on, although the long end is right at technical support.

Stopping right here, there is plenty of information backing a bullish case.  The primary drawback to this argument are the breadth indicators, but they can either be overlooked, their importance downplayed relative to the other chart data or that a sell-off at these levels represents a buying opportunity. 

That leads to the fundamental economic argument.  And here is where I have problems.

Let's start with the US, whose economy has been stuck in a below par recovery for several years during which the year over year percentage change in GDP hasn't crossed 3%.  Unemployment is still at 7.8%.  Incomes are weak and wage growth is occurring at a snails pace.  Employment growth is occurring, but not at a strong clip.  In short, we're doing OK, but certainly not going gangbusters. And while it does appear that housing is finally coming out of its recession (which could have a decent multiplier effect for the overall economy), that re-emergence is countered by the fiscal follies in Washington, and the imminent impact of the first sequester on March 1.  The negative balance is made worse by the slight contraction in US GDP in the fourth quarter, largely as a result of government spending.

As I noted earlier this week, it appears that the UK is about to enter another recession, its third since the end of the Great Recession leading economic writers to coin the phrase triple dip.  Most importantly, there is little evidence suggesting that the UK government is willing to change its austerity loving ways, despite the fact that it doesn't work or that UK GDP has been more or less stagnant since it came out of recession.

The EU still has unemployment at 11.8% and rising with an overall economy in a recession.  There are signs that the economy has at least bottomed: deposit growth is increasing, Spanish and Portuguese bond yields are low and declining, business sentiment appears to have stabilized (although at very low levels), some money is being repatriated to the periphery, and bullish future market bets on the euro are at some of their highest levels in over 6 months.  The emerging consensus is that the worst of the crisis is over, largely thanks to the EUs July 2012 speech where they said they would to whatever it takes to save the euro alliance.  But, a recovery probably won't happen until at least the end of the second quarter if not later. 

Japan is facing extremely difficult economic headwinds.  On the good side, the yen is finally dropping.  This is extremely good news, as the Japanese experienced a balance of payments contraction during several months over the last year and half, creating a huge problem because the positive BOP was probably the only good things going for the country.  However, the country is still stuck in a deflationary economy with the new Prime Minister forcing the BOJ to publicly state the bank would (finally) accept a 2% inflation rate.  This is in combination with a fiscal package to encourage GDP growth.

The other emerging economies (Russia, Brazil and India) are now firmly in slower growth mode.  Russia is painfully hard to analyze thanks to a remarkable lack of consistent and transparent economic data, while Brazil is suffering from lower growth and higher inflation.  India recently lowered rates and reserve requirements because of growth concerns.  In short, the BRIC story has clearly lost steam and shows no signs of re-emerging as the predominate growth story.

That leaves China as the sole engine for global growth.  And here we run into intersecting issues.  First, they have clearly moved into slower growth mode, targeting GDP expansion in the range of 7%-8%.  Secondly, they are looking to slowly change their GDP model from an export  driven model to one that is consumer driven -- a process that is already taking place.  This means the Chinese growth will  not have the ancillary effect of increasing growth in raw materials exporters such as Brazil and Australia, but will instead lead to more internally led growth with Chinese company A selling goods and/or services to Chinese consumer B.  The former situation will still exist, but not to the same degree as before.

To sum up the national and international position, I just don't see strong enough overall growth in any economy to warrant a strong long position right now.  The best reading of the data is that we'll see a stronger second half, with the US housing market providing sufficient domestic stimulus combined with a more settled fiscal situation.  This would also allow the EU to continue strengthening or bottoming. The stronger second half argument leads could lead into the fact that the market is a leading indicator of anticipated future activity -- a fair point as far as it goes, but I just don't see the overall underlying strength to support the rally long term.

It could be that I'll miss the first part of the new rally while the fundamentals strengthen, meaning I miss the first leg.  That's fine.  It could also mean that we've got a different type or rally relative to the fundamentals going on -- an analysis I doubt as I'm not a strong believer in the, "this time it's different" economic argument.  However, while I'm not seeing an imminent collapse, I'm also not seeing growth to support a long and sustained meaningful rally.


Wednesday, January 30, 2013

Guess What? Austerity Doesn't Work in the US Either

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. 

In the third quarter, real GDP increased 3.1 percent.The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, decreased.

The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.

Let's look at a chart that shows the percentage change in GDP and the contributions to that change:

Oh look -- government spending dropped 6.6%, with a drop of 15% at the federal level and a 22% drop in defense spending.  And look what happened to overall GDP -- it contracted slightly.  Imagine that.  Where have I heard this argument before?

Morning Market Analysis: Is It Time To Turn Bullish? Part III

There's been a fair amount of press over the last few months, stating that individual investors were moving out of bonds and into stocks.  This would obviously bode well for equities, as this would provide a new source of money.  Let's start by looking at the weekly charts of the treasury market ETFs, from shortest to longest:

The entire treasury curve is consolidating in a sideways move.  The longer end of the curve (bottom three charts) are clearly more technically vulnerable to a correction.  All three charts have declining MACDs and weak (albeit slightly positive) CMF readings.  The TLTs (bottom chart) are now below the 50 week EMA and the IEI's and IEFS' (third from bottom and second from bottom) are making a move in that direction.  In addition, the longer charts also have declining shorter EMAs now.

In summation, the treasury market looks as though its ready to start selling off, especially considering the technical position of the long end.  However, we're not there yet.  In addition, treasuries are still a safe haven asset, so an international event could spook the markets into a short rally.

The corporate market is starting to show important technical break downs as well.  First, all three sections of the market (short; top chart; intermediate, middle chart and long, bottom chart) have broken long-term trend lines.  All three have declining MACDs and the long-term chart has a very negative CMF reading.

In short,  all three of these charts indicates that a sell-off is probably beginning in this area of the market.

The sum total of the above three chart is that the corporate market has broken trend and the treasury market is right on the verge.


Tuesday, January 29, 2013

Canada Hits A Speed Bump


The daily chart of the Canadian dollar (top chart) shows that last week prices dipped sharply, falling from ~101.75 to ~ 98.75, or a drop of a little over 3%.  Over the same period, prices fell through all the EMAs and are now in bear market territory.  On the weekly chart (bottom chart), notice that the upper 90s provide important technical support for the currency, with the next logical price target being the 38.2% Fib level from the mid-2012, fall 2012 rally.  Also note the declining MACD and CMF reading on this chart as well.  In short, it appears as though the Canadian dollar has suddenly switched to a bear market.  The question is, why?

Last week, the Canadian Central Bank stated it would keep interest rates at 1%.  More importantly, consider the following statements issued in conjunction with that announcement:

In Canada, the slowdown in the second half of 2012 was more pronounced than the Bank had anticipated, owing to weaker business investment and exports. Caution about high debt levels has begun to restrain household spending. The Bank expects economic growth to pick up through 2013. Business investment and exports are projected to rebound as foreign demand strengthens, uncertainty diminishes and the temporary factors that have weighed on resource sector activity are unwound. Nonetheless, exports should remain below their pre-recession peak until the second half of 2014 owing to a lower track for foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.  Consumption is expected to grow moderately and residential investment to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.

Relative to the October MPR, Canadian economic activity is expected to be more restrained. Following an estimated 1.9 per cent in 2012, the economy is expected to grow by 2.0 per cent in 2013 and 2.7 per cent in 2014. The Bank now expects the economy to reach full capacity in the second half of 2014, later than anticipated in the October MPR.

Core inflation has softened by more than the Bank had expected, with more muted price pressures across a wide range of goods and services, consistent with the unexpected increase in excess capacity. Total CPI inflation has also been lower than anticipated, reflecting developments in core inflation and weaker-than-projected gasoline prices. Total CPI inflation is expected to remain around 1 per cent in the near term before rising gradually, along with core inflation, to the 2 per cent target in the second half of 2014 as the economy returns to full capacity and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent.  While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.

To translate:
  • The Canadian economy is growing slower than expected
  • High domestic debt levels are slowing growth
  • Exports will remain below pre-recession peaks until mid-2014 -- 6 quarters from now
  • Consumption is growing, although slowly
  • There has been an increase in excess capacity
  • Price pressures are muted
Put more succinctly, the Canadian economy is under pressure from both international and domestic pressures, leading to a lower growth situation.

A Quick Note on the Durable Goods Report From Yesterday

Yesterday we learned that US durable goods increased by 4.6% -- a good number.  Ex transportation and an defense expenditures, we still saw increases.  The report noted we've seen increases in seven of the last eight months.  This is technically true.  However, consider the following charts:

On the 5 year chart, we see more of a general plateau in orders over the last year.  And while yesterday's spike in orders could be the harbinger of a new upswing in orders, consider we're seen similar upswings twice in the last few 12-14 months, only to be disappointed.  Also ask yourself -- who would account for the increase in orders?  Japan, the UK and the EU are all in a recession or operating at very slow rates.  That leaves China, which is still growing but may not be large enough to sustain a continued increase.

Consider the lat year's worth of data:

Yes, there have been increases.  But you could also make an argument that orders have coalesced around the 220-224 level with the exception of the 08/12 drop.  

Also note this is occurring at a time when US manufacturing is sending mixed signals.  First note the latest Markit report (h/t Sober Look):

The U.S. manufacturing sector is showing signs of regaining momentum as the year comes to a close. Producers reported the largest monthly increase in output since April, with the rate of growth picking up for the third month in a row, suggesting output is now growing at an annualised rate of around 4% compared to the contraction seen back in October.

Such a steady run of improved growth of production is a good indication of a turning point in the economy as a whole, especially as it is feeding through to higher employment. The manufacturing sector has been acting as a drag on the official payroll numbers in recent months, but this situation looks to be changing as firms take on increasing numbers of workers in line with fuller order books.

But in contrast to the Markit report, we're still seeing weakish readings from various regional surveys.  The Empire State index is at -7.8, the Richmond Fed's index is at -12, the Philly Fed's index is at -5.8, and Texas' is at 12.9.  These are not strong numbers, nor are they very encouraging.

Put another way, we need more data to determine if this is the beginning of a new upswing in orders, or simply a strong move higher that will eventually disappoint (again).