Saturday, April 6, 2013

Weekly Indicators: significant deterioration to negativity edition

 - by New Deal democrat

Monthly March data released in the past week was dominated by the jobs report, showing only 88,000 jobs had been created. Despite that, aggregate hours worked increased significantly. The unemployment rate declined, with the normal issue about how much is due to workers simply giving up looking vs. the wave of Boomer retirements. The ISM reported that manufacturing activity decelerated to just slightly positive, and services activity decelerated slightly. Vehicle sales declined very slightly. Consumer credit for February was up, while January was revised down.

Let's start this week's look at the high frequency weekly indicators by noting some increasingly negative data:

Employment metrics

Initial jobless claims
  •   385,000 up 28,000

  •   4 week average 354,250 up 11,250
American Staffing Association Index
  • flat at 91 w/w up 2.4% YoY

Initial claims had established a new lower range of between 330,000 to 375,000 this year. In the last two years, beginning at the end of the first quarter there has been a spike of 20,000+ in jobless applications, and we certainly have seen the pattern repeat in the last two weeks.  The ASA is still running slighty below 2007, and slightly ahead of last year.

Daily Treasury Statement tax withholding

  • $145.8 B (adjusted for 2013 payroll tax withholding changes) vs. $151.8 B, -4% YoY for the last 20 days.  The unadjusted result was $169.7 B for a 11.8% increase.

  • $186.6 B was collected during the month of March vs. $166.4 B unadjusted in 2012, a 12% increase YoY.
Except for last week, these are the best YoY comparisons in over two months. While my best estimate is that collections should be up 15% due to the payroll tax increases that took effect on January 1, since that may not be accurate, now that we have enough data from this year I'm starting to make comparisons with earlier this year, and those comparisons have been improving.


Railroad transport from the AAR
  • -5500 or -1.9% carloads YoY

  • -3300 or -1.8% carloads ex-coal

  • -11,200 or -3.8% intermodal units

  • -14,800 or -2.8% YoY total loads
Shipping transport Rail transport had its worst week in a long time this past week, and now bears watching more closely.  The Harpex index remains slightly off its 3 year low of 352, and the Baltic Dry Index remains above its recent low.

Consumer spending Gallup had been very positive for 3 months. This week's YoY comparison is with the best spending days of the first half 2012, and was still up over 5%. At the same time, April spending has been the lowest daily amount so far this year.  The ICSC varied between +1.5% and +4.5% YoY in 2012. with one exception, the report for the last few weeks has been near or even below the bottom of this range. The JR report this week is at the top of its typical YoY range for the last year.  Although the Gallup data is now more wobbly, consumer spending has still not collapsed due to the tax withholding increase.

Housing metrics

Housing prices
  • YoY this week. +4.0%
Housing prices bottomed at the end of November 2011 on Housing Tracker, and have averaged an increase of +2.0% to +2.5% YoY during 2012. This week prices continued their retreat from the best YoY comparison in about 7 years, established several weeks ago, but were still very positive.

Real estate loans, from the FRB H8 report:
  • down 3 or -0.1% w/w

  • down 2 or -0.1% YoY

  • +1.9% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last month these have completely stalled and are now slightly negative.

Mortgage applications from the Mortgage Bankers Association:
  • +1% w/w purchase applications

  • +4% YoY purchase applications

  • -6% w/w refinance applications
Purchase applications had been going sideways for 2 years. In the last couple of months they have finally broken out of that range - slightly - to the upside.  Refinancing applications were very high for most of last year with record low mortgage rates, but have decreased recently with an increase of mortgage rates.

Interest rates and credit spreads
  •  4.83% BAA corporate bonds down -0.02%

  • 1.90% 10 year treasury bonds down -0.04%

  • 2.93% credit spread between corporates and treasuries up +0.02%
Interest rates for corporate bonds have generally 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.  The  last several months have seen a marked increase in rates and credit spreads have widened.

Money supply

  • +1.5% w/w

  • -0.9% m/m

  • +8.1% YoY Real M1

  • +0.2% w/w

  • +0.3% m/m

  • +4.7% 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. In absolute terms, M2 made a high almost 3 months ago and is down -0.3% from that peak. The behavior of M2 continues to bear close scrutiny.

Oil prices and usage
  •  Oil $92.37 down -$4.70 w/w

  •   gas $3.65 down $0.03 w/w

  • Usage 4 week average YoY +1.7%
The price of a gallon of gas has declined sharply since the end of February, and is actually down narly 10% YoY.  Unusually for the last year plus, the 4 week average for gas usage for the ninth week in a row was positive YoY. This probably reflects cooler weather in February and March compared with last year.

Bank lending rates The TED spread recently increased slightly off its 18 month+ low.  LIBOR remained at its new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices
  • down 0.77 to 127.32 w/w

  • +2.55 YoY
I have looked over my "Weekly Indicators" columns since January. The evidence that the economy was beginning to soften showed up in my first column in February, and the high frequency indicators have become more neutral or evidencing a stall since then. This week they have come close to a critical mass of negativity. Previously very few of the indicators were actually negative, but those are increasing, and there are very few strongly positive indicators now.

The positives include housing prices and mortgage applications, gas prices lower than one or two years ago, and increasing petroleum usage. Money supply is positive, although less so than previously. Commodities are mildly positive. Consumer spending as measured by Johnson Redbook is positive, as is Gallup although Gallup is much less positive than the last 4 months.

Basically neutral indicators include shipping rates, interest rates, temporary jobs, and depending on the reference point, tax withholding. Overnight banking loans haven't budged.

Negatives have expanded to include rail transport, real estate loans, credit spreads, and initial jobless claims.

The tone remains had been positive, but muted, in the last several months. It is now tilting a little more towards negativity. My suspicion is that the combination of the payroll tax increase and sequestered budget cuts are now showing up int he high frequency data. This is not good.

Have a nice weekend.

Friday, April 5, 2013

Weekend Weimar, Beagle and Pit Bull

It's that time of the week.  I'll be back on Monday; NDD will be here over the weekend. 

Until then ...

Market Analysis: Oil

Consider the following chart of the oil inventory from This Week in Petroleum:

For nearly a year, the US has had ample supply of oil.  Excess supply = lower price.  And as NDD has noted this week, domestic oil production is up, fuel efficiency is up, the sale of hybrids is picking up, US demand is stable and the use of mass transit is increasing (see here and here).  Put another way, there are ample events leading to downward pressure on prices.

Also consider that the EU is in the middle of a recession and US growth is not as strong as it could be.  Both of these events are lowering demand, although they are both more cyclical.

Since the beginning of March, oil prices have rallied from a little over 90 to just over 97 this week.  However, prices have dropped sharply over the last two trading sessions.  Prices have moved through the lower Fib fan, making the 200 day EMA the likely price target.  Finally, notice the volume spikes over the last few days, indicating traders are shorting positions.

Finally, I've added two weekly chart.  The top chart shows that for the last two years, prices have been trading between the 38.2% and 61.8% Fib level of the 2008-2009 sell-off.  The second chart shows that prices have been consolidating  in a triangle pattern on declining volume. 

So -- What Gives With the Employment Report? Are We Seeing Sequester Impacts?

Given the less than stellar jobs report, and its close proximity to the sequester, it's natural ask if this report's lower employment readings are the result of the sequester.

In general, no.  The sequester went into effect on March 1, whereas the BLS ends its data collection mid-month  So, at the most, we're looking two weeks of impact on these numbers from the sequester.

However, consider the massive drop in retail employment, which saw a large drop of 38,700.  Also remember that the payroll tax hike went into effect at the beginning of the year rather than March 1.  As a result, we could be seeing the initial impact as retailers either anticipate weaker sales, or, they are already seeing weaker retail sales and are acting accordingly.  We don't know the actual percentage of the previously mentioned possibilities, but if its more latter than former, we do have big problems.

There was also a drop of 7,000 in government employment.  However, consider this chart of the total monthly change in government employment for the last five years:

We've been seeing a slow bleed for the entire expansion, making the argument that this month's drop is caused by the sequester unsatisfying.

Finally, we had a huge drop in construction employment, which went from an increase of 49,000 to 18,000.  The most likely answer here is that construction firms increased their hiring last month either because of jobs on the books or anticipation thereof, but just don't need more employees relative to anticipated building.

I do think there is a decent probability this number will be revised higher, but we'll have to wait for the next few reports to see if that actually pans out.

The best awful employment report I've ever seen

- by New Deal democrat

Just to show you that Bonddad and I don't always share the same opinion . . .

The headlines for most analyses of this morning's employment report are probably going to be very negative, with only 88,000 jobs added. The darned thing is, when you drill down into the internals of the report, many of them had a real positive jump, and are at their best levels ever since the onset of the 2008 recession.

Here's a few items that ought to make you take a bunch of deep breaths:
  • The broad U-6 unemployment rate, that includes discouraged workers, fell a full .5% from 14.3% to 13.8%

  • the index of aggregate hours worked in the economy also surged .3 from 97.9 to 98.2

  • temporary jobs - a leading indicator for jobs overall - increased 20,300

  • construction jobs added 18,000

  • the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - fell by 203,000 to 2,464,000. This may be a new post-recession low. If it isn't, it's close (I'll double check this and update). UPDATE: It's the second best by 11,000. In March 2011, the number was 2,453,000. This is NOT recessionary.

  • January's report was revised up 29,000 to 198,000. February was revised up 32,000 to 268,000. Positive revisions like this happen in recoveries, not at the onset of recessions

  • average hourly earnings increased $.01. While the YoY change declined to +1.8%, when we get the CPI for March we are probably going to find that real, inflation adjusted hourly earnings are the most positive in several years

  • the average workweek increased .1 to 34.6

  • overtime hours increased .1 to 3.4

  • the most commonly reported unemployment rate, U-3, also declined to a new post-recession low of 7.6%

Negatives included:
  • the alternate jobs number contained in the more volatile household survey showed -206,000 jobs lost

  • the average manufacturing workweek declined -.1 to 40.8 hours. This is one of the 10 components of the LEI and will affect that number

  • manufacturing lost -3000 jobs. This is a leading element of the jobs report

  • government shed -7000 jobs

Finally, in what I guess will provoke the most heated debate from this report, almost 500,000 people dropped out of the labor force. This is why the various unemployment measures declined. The employment/population ratio declined to 58.5%, and the labor force participation rate dropped to the lowest level since 1979. How much of that is pessimism by potential employees, and how much is the ever increasing level of Boomer retirements I will leave up to the combatants, but you probably would be right figuring that a lot of both is going on.

Exactly one year ago, we got an employment report that similarly looked awful, with only +120,000 jobs added. By the time the revisions were completed, that number had risen to +205,000. I don't mean to gloss over the negatives in this report, and I am very concerned as I have been since the beginning of the year about the impact of the payroll tax increase and now of the sequester. But I am going to take a deep breath, because there are simply too many good internals in this report for me to proclaim that we are DOOMED!

Employment Report: Bonddad Is Not Pleased

From the BLS:

Nonfarm payroll employment edged up in March (+88,000), and the unemployment rate was little changed at 7.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment grew in professional and business services and in health care but declined in retail trade.

The headline number is extremely disappointing.  Let's delve into the details, starting with the household survey.

There are a few important points here.

1.) The number of employed dropped 206,000.
2.) The participation rate dropped .2%.
3.) The employment/population ratio decreased .1%
4.) The unemployment rate decreased 1%.

With the exception of the unemployment rate, none of these developments is healthy.

The unemployment rate does continue to move in the right direction.  However, notice how the total establishment job number is very disappointing relative to the progress that had been made?  Not good.

I've highlighted what I think are the big reasons for the drop.

1.) Total goods producing jobs cratered last month.  In February we see an increased of 73,000, compared to a March increase of 16,000, for a decrease of 57,000.

2.) The big drop occurred in the construction figure, which went from an increase of 49,000 to 18,000.  This accounts for 54% of the drop in the goods producing number.

3.) Non-durable goods manufacturing dropped by 17,000, going from a net positive of 10,000 to a decrease of 17,000.  This accounts for an additional 30% of the drop in goods producing jobs.

4.) Notice the mammoth drop in retail.  We went from an increased or 14,600 to a decrease of 24,100.  This is a big reason for the drop.  The losses were side spread.  From the report:  In March, job declines occurred in clothing and clothing accessories stores (-15,000), building material and garden supply stores (-10,000), and electronics and appliance stores (-6,000).

5.) Notice the 7,000 loss in government jobs.  Hello sequester.  Thanks for adding to my misery.  I'm sure you'll be back next month.

The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.6 hours. The manufacturing workweek decreased by 0.1 hour to 40.8 hours, and factory overtime rose by 0.1 hour to 3.4 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.8 hours. (See tables B-2 and B-7.) 

In March, average hourly earnings for all employees on private nonfarm payrolls, at $23.82, changed little (+1 cent). Over the year, average hourly earnings have risen by 42 cents, or 1.8 percent. Average hourly earnings of private-sector production and nonsupervisory employees, at $20.03, changed little (-1 cent) in March. (See tables B-3 and B-8.)

The decrease in the manufacturing workweek will subtract from the next LEI report.

Here's the one bit of good news:

The change in total nonfarm payroll employment for January was revised from +119,000 to +148,000, and the change for February was revised from +236,000 to +268,000.

Maybe that will happen with this report.

Market Analysis: India -- Not Looking Promising

The weekly Indian ETF chart shows that for the last year, prices have been trading in a range between roughly 47.5 and 62.5 -- a range of about 30%.  Most importantly, the rally chart started last May has been broken; prices are slow below the 200 week EMA on declining momentum and lowering participation.

On the daily chart, we see that prices have recently been trading between the 56 and 62.5 levels.  However, technically we see a declining MACD and weakening CMF.  Also note that prices are just below the 200 day EMA on this chart as well.

I've been bearish on India this year (see here, here and here). 

Overall, in the links above we see some fairly entrenched problems such as extreme policy uncertainly, inflation, lowered growth, and large budgetary and current account deficits.

The latest Markit Manufacturing report is good, but there are underlying concerns:

Indian manufacturing business conditions continued to improve in March, but persistent powercuts weighed on growth. Moreover, the volume of incoming new work increased moderately and at the slowest pace in 16 months. Export orders expanded slightly, with the rate of growth easing to the slowest in seven months.

The seasonally adjusted HSBC Purchasing ManagersIndex™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 52.0 in March (down from 54.2 in February), indicating an improvement in overall business conditions. However, the PMI was down to the lowest reading in 16 months.

March data signalled higher volumes of incoming new work in the Indian goods-producing sector. Growth in total new orders was, however, only moderate and the slowest in 16 months. Export orders rose slightly with the rate of expansion also easing. Output increased modestly, as persistent power shortages hampered
production. The pace of growth was the slowest in 16 months.

The key thread running through the above report is that things are good, but they are at their lowest reading in 16 months.  Here is a chart of the data:

Turning to the services index, we see the following:

Output in the Indian private sector rose during March, extending the current expansionary sequence to 47 months. However, the HSBC India Composite Output Index fell from 54.8 in February to 51.4 indicating that activity increased slightly, and at the slowest pace in 17 months. Output growth eased across both the manufacturing and service sectors.

After adjusting for seasonal factors, the headline HSBC Services Business Activity Index registered 51.4 in March, down from 54.2 in February, signalling a further monthly expansion of services output. That said, the latest increase in business activity was only slight as new business growth eased. Moreover, the index posted well below the long-run series average (57.2).

As with the manufacturing numbers, we see some good data points.  However, and again, we see the phrase lowest in 17 months.

Last week the Reserve Bank of India lowered its interest rate 25 basis points.  Here are some salient points from that release:

4. India’s GDP growth in Q3 of 2012-13, at 4.5 per cent,  was the weakest in the last 15 quarters. What is worrisome is that the services sector growth, hitherto the mainstay of overall growth, has also decelerated to its slowest pace in a decade. While overall industrial production growth turned positive in January, capital goods production and mining activity continued to contract. The composite purchasing managers’ index (PMI) declined in February, largely reflecting slower expansion in services. In the agriculture sector, the second advance estimates of kharif production indicate a decline in relation to the level last year. However, that may be offset, at least partly, by the rabi output for which sowing has been satisfactory.

Fiscal Situation

7. The Union Budget for 2013-14 has made a firm commitment to fiscal consolidation. According to the revised budget estimates for 2012-13, the gross fiscal deficit (GFD)-GDP ratio, at 5.2 per cent, was contained around its budgeted level, mainly by scaling down plan and capital expenditures. The GFD-GDP ratio is programmed to decline to 4.8 per cent in 2013-14 and further down to 3.0 per cent by 2016-17, in line with the revised road map for fiscal consolidation.

External Sector

8. With merchandise exports recording positive growth for the second successive month in February and non-oil imports contracting, the trade deficit narrowed significantly. For April-February 2012-13, however, the trade deficit was higher than its level a year ago with adverse implications for the current account deficit (CAD), already at a record high. Although capital inflows, mainly in the form of portfolio investment and debt flows, provided adequate financing, the growing vulnerability of the external sector to abrupt shifts in sentiment remains a key concern.

The outlook is not promising:

11. The Central Statistics Office (CSO) has projected GDP growth for 2012-13 of 5.0 per cent, lower than the Reserve Bank’s baseline projection of 5.5 per cent set out in the TQR, reflecting slower than expected growth in both industry and services. Key to reinvigorating growth is accelerating investment. The government has a critical role to play in this regard by remaining committed to fiscal consolidation, easing the supply bottlenecks and improving governance surrounding project implementation.

12. On the inflation front, some softening of global commodity prices and lower pricing power of corporates domestically is moderating non-food manufactured products inflation. However, the unrelenting rise in food inflation is keeping headline wholesale price inflation above the threshold level and consumer price inflation in double digits. Also, there is still some suppressed inflation related to administered prices which carries latent inflationary pressures. All this complicates the task of inflation management and underscores the imperative of addressing supply constraints. From an inflation perspective, upward revisions in the minimum support prices (MSP) should warrant caution in view of their implications for overall inflation.

Despite the strong reading from both the manufacturing and service sectors, there are serious structural problems.  Inflation is too high, limiting the policy options available to the central bank.  The government is very difficult to work with, the power infrastructure is in terrible shape and there are two large deficits -- budgetary and current account.

Thursday, April 4, 2013

The Oil choke collar loosens: conservation

- by New Deal democrat

This is another update on how technology, conservation, and new sources of energy finally seem to be loosening oil's choke hold on the US economy this year. Last week I pointed out the obvious, that gas prices are actually lower than they were a year ago this year, especially as a share of wages earned by average Americans. Earlier this week I noted the substantial increase in sales of hybrid vehicles and more energy-efficient vehicles, as well as the greatly increased US crude oil production.

That isn't all that is happening. According to the American Mass Transit Association, the use of mass transit keeps on increasing:
In 2011, Americans took 10.4 billion trips on public transportation, the 2nd highest annual ridership number since 1957
Further, ridership continued to increase in 2012 to a near record. But for the impact of Sandy on the NYC-NJ area, which knocked back usage of mass transit in the biggest metropolitan area in the cournty last autumn, a new record would indeed have been set.
Mass transit ridership increased nationwide last year, according to new numbers Monday, an indication that more people are going back to work and high gasoline prices are changing how they get there..... [despite the fact that] declines in the state, local and federal tax revenues that support transit systems have forced many of them to cut back service.

.... U.S. transit systems recorded 10.5 billion trips last year, the second-highest level since 1957. The numbers would have been even higher if Superstorm Sandy on Oct. 29 hadn't crippled transit systems throughout the Northeast.

...[V]olatile gasoline prices have driven many commuters to seek alternatives. "People have found transit to be a good value," said Michael Melaniphy, the president and chief executive of the American Public Transportation Association.
Americans' use of more efficient means of transport has caused the long-term trend in gasoline usage to continue to decline. Here is the graph from 1991 to the present from the E.I.A. (I truncated the graph to allow it to fit better. The second line from the top represents 10m barrels a day, the third line 7.5m):

Although the economy has been growing for almost 4 years, and employment for 3 years, gasoline usage has generally continued to decline on a YoY basis. Gas usage is down where it was in the 2000-2002 time frame, even though there are about 6 million more commuters going to work.

To be continued ...

Initial claims: DON'T PANIC! ... yet

- by New Deal democrat

Initial claims were reported this morning at 385,000, far above estimates and far above what we were seeing just a few weeks ago. If this were truly "organic," it would be what I would expect to see on the cusp of a new recession.

But it may not be organic. For the last two years, we have had similar increases of about 40,000 in claims from March into April, so it may be an issue of unresolved seasonality in the reports. Here's the graph I published a couple of weeks ago on that subject:

One other thing that almost certainly is happening is that layoffs due to the US government "sequester" are now showing up and having an impact. Unfortunately since the initial claims are not broken out via type of employer, it's impossible to know today how much of the total increase is due to those layoffs. Tomorrow's March employment report should give us some information (although that report will be based on interviews conducted before mid-March, so sequestration-related layoffs will probably not even show up in full there).

If the increase is not due to hidden seasonality, but is "real," even if all due to the sequester, this would be the first big sign that continuing fiscal idiocy in Washington is dragging the economy back down towards contraction.

Market Analysis: China. Looking Good

Consider these charts of the Chinese market:

On the daily chart we see a general decline from May to December of last year.  During this time, the People's Bank of China was engaging in a more restrictive monetary policy, leading to lower growth.  However, starting in December of last year, we see a major spike in activity caused by the bank loosening credit a bit.  Prices rallied a little over 15%.  However, notice that for the first three months of 2013 prices have formed a head and shoulders top, with prices currently trading just below the 200 day EMA.  Also note the weak momentum reading.

The weekly chart shows that prices have been declining for the better part of two years.  The more recent rally rose to levels seen in early 2012, but have since fallen a bit. 

The question now becomes, is China ready to retake its lead as the global growth engine.

Let's start by looking at the latest Markit manufacturing survey:

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.6 in March, up from 50.4 in February, signalling a modest improvement. Operating conditions in the Chinese manufacturing sector have now improved for five consecutive months.

Production levels increased for the fifth month in a row in March. The rate of expansion accelerated from February to a solid pace, the second-fastest in two years. Behind the rise in output, total new orders rose solidly, and for the sixth month in a row. A number of respondents attributed growth to strengthened client demand. Meanwhile, new export orders also increased, albeit marginally.

Volumes of outstanding business declined for the second successive month in March. The rate of backlog depletion was broadly unchanged from February, and remained slight overall. Staffing levels, however, were relatively unchanged from the previous month.

Overall, these are good numbers and should be read bullishly. 

Now let's turn to the service numbers.

HSBC China Composite PMI™ data (which covers both manufacturing and services) signalled a further expansion of output during March. Activity has now risen at the composite level for seven successive months. Furthermore, the rate of expansion accelerated from February to a solid pace. The HSBC China Composite Output Index posted 53.5 in March, up from February’s four-month 
low of 51.4.

Output rose simultaneously across both the manufacturing and service sectors for the fifth consecutive month during March. Furthermore, both sectors reported solid rates of expansion. The service sector recorded the strongest rate of growth out of the two sectors, with the latest expansion the fastest in six months. The HSBC China Services Business Activity Index recorded 54.3 in March, up from 52.1 in February.

Total new business growth also accelerated in March, with both monitored sectors posting solid rates of expansion. Moreover, new order growth at the composite level was the second-strongest in 26 months.

Volumes of outstanding business fell at both manufacturing plants and service providers during March. However, the rates of depletion were only slight in both cases. At the composite level, backlogs of work declined for the second successive month.

Again, we see an overall strong report and one that shows continued improvement.

Finally, let's turn the LEIs for China as published by the Conference Board:

The Conference Board LEI for China increased in February. Consumer expectations, total loans issued by financial institutions, and the (inverted) PMI supplier delivery index all made large positive contributions to the index this month. The leading economic index increased by 6.2 percent (about a 12.8 percent annual rate) between August 2012 and February 2013, about the same rate of growth as in the previous six months. The strengths among the leading indicators have remained more widespread than the weaknesses in recent months.

Let's look at the data in more detail:

In the chart above, I've circled the negative events over the last 6 months.  Notice there are 8 -- a very impressive showing.

The above data tells us that the Chinese market is currently taking a breather, consolidating gains and waiting for news to move higher.

Wednesday, April 3, 2013

Market Analysis: Grains

Consider the following from Agrimoney:

Corn futures plunged the exchange limit in Chicago, with soybean and wheat prices falling too, after the US said that its stocks of all three crops were larger than had been thought, easing concerns over tight supplies.
The US Department of Agriculture added to ideas of an easing in the corn supply squeeze by pegging domestic sowings of the grain at 97.3m acres, a little above market expectations, and the largest area since 1936.
The USDA said that US corn inventories as of the beginning of the month had fallen to 5.40bn bushels, down some 600m bushels year on year, but well above the figure that investors had expected following last year's drought-hit harvest.
Hedge funds have been badly burned by the continuing slump in grain and oilseed futures prompted by US crop inventory data, having bet on the stocks statistics sparking a surge in prices.
Managed money, a proxy for speculators, raised their net long position in Chicago corn futures and options to more than 192,000 lots in the week to last Tuesday, according to data from the US Commodity Futures Trading Commission.
Corn plunged the most in 24 years, entering a bear market, as bigger-than-expected U.S. stockpiles and increased planting signal ample supplies. Wheat tumbled to a nine-month low and soybeans dropped.
U.S. corn inventories on March 1 totaled 5.399 billion bushels, the Department of Agriculture said March 28. While down from a year earlier, that’s still above the 4.995 billion forecast by analysts surveyed by Bloomberg News. Farmers will plant 97.282 million acres this year, the most since 1936, the USDA said. Prices reached the lowest since June today. 

After last year’s drought cut U.S. output by 13 percent and sent futures to a record, demand slowed as high grain costs forced livestock producers including Cargill Inc. to close beef plants, while ethanol producers including Poet LLC shut distilleries. Lower prices may further erode global food costs that fell for a fifth month in February, according to a gauge compiled by the United Nations’ Food & Agriculture Organization.

“The market expected a bullish report last week and got the opposite,” Dave Marshall, a farm marketing adviser at Toay Commodity Futures Group LLC in Nashville, Illinois, said in a telephone interview. “Today we’re just seeing follow-through selling from being caught on the wrong side of the market.” 

Let's place this into historical context:

On the weekly chart of the grains ETF, we see three price spikes.  The first occurred in 2008, the second occurred in 2011 and the third occurred last year.  Weather related incidents were a primary cause of all three, along with a growing world population that wanted a better diet.

Looking at more recent price action we see last year's price spike along with prices selling off to the 50% Fib level from last summer to the end of last year.  Since then prices have been relatively stable, more or less moving sideways between the 51.5 and 55 level.  While momentum has been negative for the last six months, note we see several CMF peaks, telling us that traders were putting money into the market.  

Over the last few days, we see the big drop in prices caused by the USDA's recent drop report. Part of the reason for the big drop is a fair number of hedge funds making bullish bets (making the assumption that we'd see another round of massive price spikes this spring from weather related issues) getting hammered by the report from the USDA.  Part of the reason for the drop is -- as stated above -- the general tenor of the market was bullish which the latest report completely crushed.

At the same time, remember this chart of the drought in the US:


 We're not out of the woods yet by any stretch of the imagination. 

Market Analysis: Colombia

Consider the following chart of GDP growth:

Colombia has seen a slowdown in GDP growth the last two quarters.  This led to the Colombian Central Bank lowering interest rates 50 basis points at their last meeting.  Here was their reasoning:

Colombia’s trading partners are likely to grow less than expected. If this provides to be the case, the contribution to the country’s economic growth stemming from external demand would remain low.  Moreover, if the trend observed in prices for Colombia’s major exports continues, terms of trade would average less in 2013 than they did last year. Consequently, aggregate spending in 2013 would see no additional boost from an increase in national revenue.

• The new data on economic growth in 2012 (4%) show a slowdown from the high levels witnessed in 2011 (6.6%). The major loss in momentum came during the second half of the year and was explained largely by a significant reduction in investment growth. The rise in private consumption slowed during 2012, reaching rates similar to its historical average. The increase in exports also declined compared to 2011, with a significant drop during the fourth quarter.
• As for the first quarter of 2013, the deterioration in trade expectations and the drop in the consumer confidence index and auto sales suggest less momentum in private consumption.  The value of exports in dollars during January was similar to the figure posted a year earlier, and industrial exports saw positive annual growth. However, indicators of business confidence suggest industry continues to contract. This momentum denotes current economic growth below potential and, hence, an increase of the shortcomings with respect to use of industrial productive capacity.

• The decline in annual inflation from 2.0% in January to 1.8% in February was similar to what the technical team predicted. This slowdown is explained largely by the reduced rate at which food prices increased, mainly those for processed foods. All measurements of core inflation declined as well.  The average for these measurements is below the target (3%), as are inflation expectations. The recent decline in international prices for energy and other commodities means less pressure on domestic inflation.

Put more generally, GDP growth has slowed.  And the slowdown has been seen across all GDP accounts: personal consumption, investment and exports.   That's not the kind of data that warms a central bankers heart.  In fact, it does just the opposite.  The one good piece of data was the dropping of the inflation rate, which gave the bank the room to lower rates.

Let's place all of this information into a market context:

On the weekly chart, we see that prices recently hit multi-year highs at the 22.5 level -- where they rose to in mid-2012.  Prices dropped after their first visit to this level, probably in reaction to the EU situation.  Prices then dropped to the 50% Fib level from the late 2011-mid-2012 rally.  They moved higher after that, hitting the 22.5% peak again at the beginning of this year.  But prices have been falling since then as the economy overall has slowed.

 The daily chart shows that for the last five months, prices have made a near-perfect arc.  However, since cresting after the first of the year, prices have continually moved lower, broaching both the upward trend line started last summer and the 200 day EMA.  Also note the declining MACD and negative CMF reading.

The recent action by the central bank has probably stopped the market bleeding for now.  However, there isn't much room for rallying optimism right now.

Tuesday, April 2, 2013

The oil choke collar loosens: hybrids, fuel efficiency, and US crude production

- by New Deal democrat

This is a follow-up on my post last week in which I noted that the Oil choke collar appears to be loosening. Two years ago, when I said I thought it might begin to loosen in about 2013, I wrote that 3 trends would gradually converge. Those were:
  • 1. Alternative fuels and technology

  • 2. Conservation

  • 3. Exploration
There has been significant progress in all 3 areas. Here are examples of alternative fuels and technology, and exploration.

Sales of hybrid-powered cars have made new highs:
At Southeast Toyota Distributors, which supplies new Toyotas to Florida and four nearby states, gas-electric hybrids accounted for 14 percent of sales last year, up from 8 percent in 2011.

.... All those factors converged to make hybrid and electric cars the fastest growing segment in the U.S. vehicle market last year, up 73 percent – from a small base. And hybrid and electric car sales should grow at least 20 percent this year to exceed 535,000 units sold, auto analyst firm Mintel has forecast.

Hybrids still represent just a tiny share of the U.S. vehicle market – roughly 3 percent last year. But growth is so strong that Toyota expects Prius to overtake Camry as its top-seller in the United States within a decade. Already, Pruis ranks as Toyota's No. 1 seller in California, the top hybrid market.
Not only are hybrid vehicles increasing their share of the auto market, but US vehicle fleet efficiency is improving rapidly:
The fuel efficiency of the nation's cars and trucks in the 2011 model year fell to 22.4 mpg, down from 22.6 mpg, as Japanese automakers produced fewer fuel-efficient vehicles because of natural disasters.

However, the Environmental Protection Agency predicted in a report released Friday that the 2012 U.S. vehicle fleet's fuel efficiency will jump to 23.8 mpg, in part because Americans are buying more fuel-efficient cars because of higher gasoline prices.

The estimated 2012 fleetwide average would be the highest since Congress created the fuel efficiency standards in 1975 and ordered the fleet mileage to double over 10 years. The EPA says since 2007, fuel efficiency has jumped 13 percent.
Next, turning to the results of exploration, here is a graph showing the production of crude oil in the US (h/t Scott Grannis:

These are just samples of what is happening to loosen the Oil choke collar. I haven't touched on foreign exploration or conservation at all. The point is, while there is no single "silver bullet," a variety of trends are slowly working to loosen the choke hold that gas prices have had on the US economy.

To be continued...

Market Analysis: Australia -- Are We At A Short-Term Peak?

Consider the following from the latest Conference Board's LEIs of Australia:

The Conference Board LEI for Australia increased slightly in January after declining in the previous two months. Stock prices and money supply made the largest positive contributions to the index this month. Despite the small gain in January, the leading economic index continued on a downward trend, falling 1.0 percent (about a -1.9 percent annual rate) between July 2012 and January 2013, slightly steeper than the decrease of 0.8 percent (about a -1.6 percent annual rate) during the previous six months. Moreover, the weaknesses among the leading indicators have remained more widespread than the strengths in recent months.

Let's look in detail at the numbers:

Looking at the trend, first notice how the LEIs have printed 5 negative months over the last 7.  And the month to month increases aren't that strong.   In addition, the 6 month percentage change numbers have all been negative for the last 7 readings.  Finally, notice that the coincident indicators are have been decreasing from 1.1 in the January to July period to 0.0% over the last two six month periods.

The above chart shows the contributions to the LEI readings over the last six months.  I've circled all the negative readings -- of which there are a large number.  In fact, only the growth in money supply and share prices have contributed positively to Australian growth over the last six month.  Most of the other indicators have subtracted from growth.

As a result:

The LEIs have been decreasing and the conincident indicators are leveling off.

In addition, let's take a look at the latest Minutes from the Central Bank of Australia's last meeting:

With the national accounts scheduled for release the day after the Board meeting, members noted that information to hand at the meeting suggested that the pace of output growth in the December quarter had been around trend. Coal and iron ore exports had grown strongly in the quarter, and most components of domestic demand were estimated to have recorded moderate growth. 

While mining investment was reported to have grown further in the December quarter, it still appeared that mining investment as a share of GDP was approaching its peak and mining firms remained focused on containing costs. The gradual shift away from investment towards production and exports in the period ahead was expected to lead to some reduction in the demand for labour in the resources sector. 

Investment outside the mining sector was estimated to have declined in the December quarter. However, there were indications that it would pick up in 2013/14, although this was expected to be modest, as business surveys of investment intentions and capacity utilisation were at below-average levels and liaison suggested that some firms were investing only to cover depreciation. Consistent with this, non-residential building approvals remained low and office vacancy rates had risen over recent quarters, reflecting softening demand for office space. Members noted that business profits had declined a little and business debt had been growing at a moderate pace of about 4 per cent per annum. 

Members observed that dwelling construction activity had picked up further in the December quarter. Forward-looking indicators such as building approvals pointed to further growth in construction in the months ahead. The increase in approvals had been geographically widespread and the Bank's liaison with builders also suggested there had been an improvement in buyer interest in some states. Overall, recent housing market developments pointed to a further moderate increase in dwelling construction in the period ahead.

Indicators of consumption had been mixed but, overall, growth appeared to have been only modest in the December quarter. The value of retail spending was unchanged over the December quarter, although figures released during the meeting indicated that spending had increased in January, which was consistent with liaison contacts reporting stronger retail spending in early 2013. Motor vehicle sales to households were flat in February but remained at a robust level, while measures of consumer sentiment had increased further over recent months, to be a bit above their long-run average levels.

Members noted that conditions in the labour market remained subdued. The unemployment rate in January was steady at 5.4 per cent, but the rate of growth of employment remained modest, the trend in total hours worked remained flat and the participation rate had declined a little further. While leading indicators of labour demand were down from earlier levels, they remained consistent with modest employment growth in the near term.

As expected, the year-ended pace of wage growth continued to slow, with the wage price index increasing by 3.4 per cent over the year to the December quarter. This slowing had been broad-based across states and industries, and was particularly pronounced in the household services and retail sectors. Information from liaison and business surveys was consistent with private sector wage growth on a quarterly basis remaining around current rates over the period ahead.

Overall, there's growth, but it's slowing.  Outside of replacing goods to cover for depreciation, business investment is down.  Non-residential investment is declining.  While retail sales are OK, they're not robust.  Most importantly, there is a potential slowing of the labor market: job growth is lackluster; total hours worked was lackluster and the participation rate had declined.

And then there is this analysis from their latest interest rate decision announcement:

In Australia, growth was close to trend over 2012, led by very large increases in capital spending in the resources sector, while some other sectors experienced weaker conditions. Looking ahead, the peak in resource investment is drawing close. There will, therefore, be more scope for some other areas of demand to strengthen. 

Recent information suggests that moderate growth in private consumption spending is occurring, though a return to the very strong growth of some years ago is unlikely. While the near-term outlook for investment outside the resources sector is relatively subdued, a modest increase is likely to begin over the next year. Dwelling investment is slowly increasing, with rising dwelling prices and high rental yields. Exports of natural resources are strengthening. Public spending, in contrast, is forecast to be constrained.

The above quick summation gives us more of the same: the investment boom in raw materials is drawing to a close.  While the bank is hopeful that something will take its place, they don't mention a specific industrial area that will take its place.  They do mention dwelling investment, but the jury is still out as to whether or not that will take the place of resource investment.

And finally, there is this article from the Financial Times regarding Australia's need to re-balance it's economy.

Let's take this data and apply it to the Australian ETF:

On the daily chart, we see two trend lines.  The one that started in mid-November has clearly been broken.   However, the one that started in last June is still good.  Prices are tangled in the 10 and 20 day EMA -- both of which are also moving sideways.  The 50 day EMA looks like it will be the next technical support level.  Additionally, momentum is dropping and prices are losing their overall strength.  However, there is still a fair amount of money moving into the market.

The weekly chart shows that prices are forming a downward triangle on decreasing momentum on declining volume.  There are two ways to read this. The bullish read is that the triangle represents a downward consolidation of the ETF.  However, consider that interpretation in light of the weakening LEI picture.  When the fundamental information is read into the data, this is looking more and more like a temporary top.

Market Analysis: Copper

Consider this from Bloomberg:

Copper futures slumped to the lowest in almost eight months after an industry report on manufacturing signaled demand may ease in China, the world’s biggest user of industrial metals. 

The Purchasing Managers’ Index was 50.9 in March, government data showed today. The median estimate of analysts in a Bloomberg News survey was 51.2. Confidence among large manufacturers in Japan improved less than economists expected. 
Stockpiles monitored by the Shanghai Futures Exchange rose to 247,591 metric tons last week, the highest in at least 10 years. In the first quarter, inventory tracked by the London Metal Exchange surged 78 percent to 569,775 tons, the highest since October 2003. 

What we're looking at is a huge over-supply issue.  In addition, while China is growing the PMIs are just slightly positive right now.

Let's place this information in context with the copper ETF:

The big news on the weekly chart was the break below support at the end of February.  Since the, prices have continued to drift lower.

The daily chart shows the move lower in far more detail.  Prices gapped lower at the end of February, consolidated in the 44-44.5 level for a few weeks, then moved lower again in mid-March.  Prices are now at the lower end of their trading range for the last year.  Additionally, we see declining MACD, RSI and CMF, along with a very bearish price picture.

I should add, however, that the internals of the latest Markit report were improving. That could make these lows the lowest we'll see for awhile.

Monday, April 1, 2013

EU, UK and US Inflation Is Under Control.

One of the most frequent counter-arguments offered to the various easing programs going on around the world is that they will lead to inflation.  However, the data does not bear that out. Consider this chart:

The EU, US and UK all have very low interest rates.  However, as the chart above indicates, none of these countries has an inflation problem.

Why Are We Seeing Inflationary Pressures in High Interest Rate Economies?

While the overall level of inflation across the globe is generally under control (a point I'll develop later this week), there are two countries that are experiencing increased inflationary pressures: India and Brazil. 

The following is from the latest interest rate announcement from the reserve bank of India

5. The year-on-year headline WPI inflation edged up to 6.8 per cent in February 2013 from 6.6 per cent in January, essentially reflecting the upward revisions effected to administered prices of petroleum products. On the other hand, non-food manufactured products inflation, and its momentum, continued to ebb along the trajectory that began in September 2012, enabled by softening prices of metals, textiles and rubber products. Worryingly, retail inflation continued on the upward path that set in from October 2012, with the new combined (rural and urban) CPI (Base: 2010=100) inflation at a high of 10.9 per cent in February 2013 on sustained price pressures from food items, especially cereals and proteins. Consequently, the divergence between wholesale and consumer price inflation continued to widen during the year.

This high level of inflation is a big concern for the bank going forward:

12. On the inflation front, some softening of global commodity prices and lower pricing power of corporates domestically is moderating non-food manufactured products inflation. However, the unrelenting rise in food inflation is keeping headline wholesale price inflation above the threshold level and consumer price inflation in double digits. Also, there is still some suppressed inflation related to administered prices which carries latent inflationary pressures. All this complicates the task of inflation management and underscores the imperative of addressing supply constraints. From an inflation perspective, upward revisions in the minimum support prices (MSP) should warrant caution in view of their implications for overall inflation.

Oddly enough, India has high interest rates.  The RBI recent cut rates, but they were cut to 7.5%.  And here's a chart of the 10-year government bond yield:

As for Brazil, consider this from the latest Brazilian inflation report:

The inflation measured by the 12-month IPCA reached 6.31% in February, 0.46 percentage points (p.p.) higher than the rate recorded in February 2012. Market prices increased 7.86% in the 12-month period up to February (up 1.89 p.p. against February 2012), while regulated prices rose 1.53% (down 3.95 p.p. against February 2012). The services sector inflation, which has been higher than total market prices, has reached 8.66% in the 12-month period up to February. The Copom evaluates that the greater dispersion of consumer price increases recently observed, seasonal pressures and pressures localized in the transportation segment, among other factors, contribute for inflation resistance.

Here's a chart of their inflation rate, which shows an obvious increase:

Brazil's discount rate is currently at 7.25%.  In addition, here is the chart of Brazil's 10-year bond yield:

So -- the two countries with some of the highest rates in the world are also experiencing country specific inflation spikes.

Morning Market Analysis

The general news trend for the US economy continues to be positive.  Last week, durables goods orders increased (with a big lift from transportation order), the Chicago national activity index increased and 4Q GDP was revised slightly higher.  As I wrote last week, there is evidence to support the thesis that the economy is doing better than we think. 

The one drawback to the recent uptick in the market is the sectors that are leading: the healthcare, utilities and consumer staples sectors led for the week and are the leading sectors for the the weekly, monthly and three month time period.   However, this might not be a sign of defensiveness, but instead a big stretch for yield among investors.

The 60 minute chart (top chart) shows the market consolidated between 154 and 156 between March 15-27.  We also see a decline in market momentum and a bit of a volume outflow during this period as traders take profits and distribute shares to new market participants.  The daily chart (bottom chart) shows this consolidation as well.  The technical indicators on the lower chart are solid: we see a rising EMA picture, shorter EMAs above longer EMAs and prices using the EMAs as technical support.  However, the momentum reading is weakening, although we see a stronger CMF.

The health care (top chart), utilities (middle chart) and consumer staples sectors are the three top performing sectors last week.  All three have very strong "on the chart" indicators -- rising EMAs etc...  The big underlying technical indicator to look at is the incredibly strong CMF reading for all three.  This indicates we're seeing a net volume inflow into the market.  The utilities and consumer staples sectors are showing solid MACD buy readings.  The health care sectors reading is a bit weaker, but still positive.