Saturday, July 13, 2013

Weekly Indicators: the Oil choke collar engages edition

 - by New Deal democrat

There was sparse monthly data reported in the last week. Consumer credit increased. Producer prices increased sharply due to the increase in oil prices in June. Consumer sentiment about the present increased. Consumer sentiment about the future, an element of the LEI, decreased even more.

The big story among the high frequency weekly indicators continued to be the spike in the price of Oil, so let's start with that:

Oil prices and usage
  • Oil $105.95 up +$2.73 w/w

  • Gas $3.49 down -$0.01 w/w

  • Usage 4 week average YoY up +2.4%
The price of Oil increased further again this week to a new 52 week high. I am unable to find any rational reason for this. The price of a gallon of gas fell slightly, but will probably turn around next week. The 4 week average for gas usage was, for the first time in a long time, up YoY.

Interest rates and credit spreads
  •  5.36% BAA corporate bonds down -0.06%

  • 2.56% 10 year treasury bonds up +0.01%

  • 2.80% credit spread between corporates and treasuries down -0.07%
Interest rates for corporate bonds had generally been falling since being just above 6% in January 2011, hitting a low of 4.46% in November 2012. Treasuries previously were at a 2.4% high in late 2011, falling to a low of 1.47% in July 2012, but have spiked back above that high. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012. After being close to that low 6 weeks ago, interest rate spreads backed up significantly but have now turned back down slightly.

Housing metrics

Mortgage applications from the Mortgage Bankers Association:
  • -3% w/w purchase applications

  • +5% YoY purchase applications

  • -4% w/w refinance applications
Refinancing applications have decreased sharply in the last 7 weeks due to higher interest rates. Purchase applications have also declined from thier multiyear highs in April, and this week were only slightly positive YoY.

Housing prices
  • YoY this week +8.6%
Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase made another new 6 year record.

Real estate loans, from the FRB H8 report:
  • +0.1% w/w

  • +0.7% YoY

  • +2.4% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have completely stalled, although this week was again positive YoY.

Money supply

  • +1.1% w/w

  • -2.1% m/m

  • +9.8% YoY Real M1

  • +0.7% w/w

  • +0.4% m/m

  • +5.3% YoY Real M2
Real M1 made a YoY high of about 20% in January 2012 and eased off thereafter. Earlier this year it increased again but has backed off its highs.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It increased slightly in the first few months of this year and has stabilized since.

Employment metrics

American Staffing Association Index
  • 94 unchanged w/w, also unchanged YoY
Initial jobless claims
  •   360,000 up +17,000

  •   4 week average 351,750 up +6,250
Tax Withholding
  • $69.6 B for the first 8 days of the month of July vs. $162.4 B last year, up +$7.2 B or +11.5%

  • $152.6 B for the last 20 reporting days vs. $137.4 B last year, up +$15.2 B or +11.1%
The ASA deteriorated to being flat or negative compared with last year in the last several months, although it rebounded slightly this week. Daily tax withholding remained in the lower part of its YoY range compared with its YoY average comparison in the last 6 months. Initial claims remain within their recent range of between 325,000 to 375,000, and have flattened out just as they have in the last 3 springs and summers. This week's spike may be due to the shortened 4th of July workweek, so I am discounting it for now.


Railroad transport from the AAR
  • +4900 carloads up +2.0% YoY

  • +3800 carloads or +2.6% ex-coal

  • +2200 or +1.1% intermodal units

  • +7200 or +1.6% YoY total loads
Shipping transport Rail transport has been both positive and negative YoY in the last several months. This week it was positive once again. The Harpex index had been improving slowly from its January 1 low of 352, but has flattened out in the last 4 weeks. The Baltic Dry Index increased this week and is close to its 52 week high.

Consumer spending Gallup's YoY comparisons are still very positive, but less so than they have been since last December. The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%. The ICSC, which had been stalling, improved this week, and Johnson Redbook remains close to the high end of its range.

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

JoC ECRI Commodity prices
  • up 1.14 to 123.13 w/w

  • +5.98 YoY
Surprisingly, despite the big run-up in Oil prices, most of the indicators remained positive, including house prices (at a new YoY record high), credit spreads, consumer spending, money supply, and bank rates. Rail had a positive week also. Slight positives included real estate loans and shipping, as well as commodity prices.

In addition to Oil prices, which should start to constrict economic activity in a month or two if they remain at this level, negatives continued to include bond prices, mortgage refinancing and purchase mortgages. Jobless claims were also a negative for the first time in a long time.

The sharp rise in interest rates and the sharp decrease in mortgage refinancing have now been joined by a big spike in Oil prices, which will shortly be felt at the pump. The big coincident indicators of the economy, consumer spending and initial jobless claims, were mixed, with consumer spending improving and jobless claims spiking. If the spike in jobless claims continues for a couple more weeks, that would be a bad sign, but I am discounting it for now.

Have a nice weekend.

Friday, July 12, 2013

Weekend Weimar, Beagle and Pit Bul

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

Bonddad Blog's Support For the New Glass Steagall Act

I realize that we really don't have a tremendous amount of pull.  However, I wanted to go on record with this policy endorsement.

From the NY Times:

Senator Elizabeth Warren on Thursday introduced an aggressive piece of legislation that intends to take the financial industry back to an era when there was a strict divide between traditional banking and speculative activities.
The bill, which is also sponsored by Senator John McCain, Republican of Arizona, and two other senators, is named the 21st Century Glass-Steagall Act. Its intention is to create a modern version of the seminal Glass-Steagall legislation from the 1930s, which placed firm limits on what regulated banks could do. It was fully repealed in 1999, laying the groundwork for the mergers that created some of the biggest banks of today. If passed, it could force many of those banks to let go of their trading operations.

Senator Warren’s bill is one of several that have aimed to add far more bite to the overhauls that have been put in place since the financial crisis. The bill serves as a jarring reminder to Wall Street of why it feared her election to the Senate last year.

Market/Economic Analysis: UK

Recent news from the UK has been very encouraging, starting with the latest Markit Services report:

UK service sector growth accelerated to its highest level since March 2011 during June as incoming new business rose at a rate unmatched for six years. The sharp increase in new business led to a marked rise in backlogs of work, and encouraged companies to take on additional staff to the strongest degree since August 2007.

Confidence regarding future activity was also retained, with expectations at their highest for 14 months. However, margins remained under some pressure as strong competition prevented companies from fully passing on higher cost burdens.

After accounting for seasonal factors, the headline Business Activity Index recorded 56.9 in June, up from May’s 54.9 and the highest reading for 27 months. Growth has now been recorded for six successive survey periods, and has continually improved throughout this sequence.

Here is the accompanying chart:

Since bottoming at the end of last year, the index has been in a strong uptrend.

UK manufacturing is also in positive territotory:

The UK manufacturing sector maintained its solid second quarter performance into June, with levels of production and new business rising at the fastest rates since April 2011 and February 2011 respectively. Domestic market conditions improved further, while demand from overseas also strengthened.

At 52.5 in June, up from a revised reading of 51.5 in May, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) posted above the neutral mark of 50.0 for the third month running. Moreover, the rate of improvement signalled by the PMI was the steepest for 25 months. The average reading over the second quarter as a whole (51.4) was the highest since Q2 2011.

The latest expansion in UK manufacturing production was broad-based, with all of the sub-sectors covered by the survey signalling increases in June. The strongest rates of growth were recorded by the Textiles & Clothing and Food & Drink categories.

The accompanying chart shows this improvement:

Note the strong reading in relation to activity over the last two years; levels are printing at strong levels for the last two years.

And the latest GDP reading was encouraging:

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.3% between Q4 2012 and Q1 2013, unrevised from the previous publication. In current prices GDP was estimated to have increased by 0.9% for the same period.

However, the Bank of England does not think the economy is out of the woods (nor should they).  Their latest policy statement kept rates at their currently low .5%.  They made the following observations:

Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile.  In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time.  Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term.  Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.  The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
While the latest data is encouraging, it is by no means indicates the economy is out of the woods.  Probably their biggest problem is the international economic environment which is poor: the EU is still in a recession and China is re-balancing its economy.  While the US is growing, it's not growing at a strong rate.

Thursday, July 11, 2013

South Korea Still Weak

From the latest central bank policy announcement:

In Korea, the Committee appraises economic growth to be continuing, albeit weakly, as exports have been generally favorable while indicators of domestic demand have alternated between improvement and worsening. On the employment front, the increase in the number of persons employed has accelerated, centering around the 50-and-above age group and the service sector.  The domestic economy is expected to maintain a negative output gap for a considerable time going forward, due mostly to the slow recovery of the global economy, although the Committee forecasts that the gap will gradually narrow.

South Korea is experiencing the same problem as all the Asian economies: a slow-growth US economy and recessionary EU are not buying the same amount of South Korean produced goods.  In addition, the drop in the yen has made South Korean goods more expensive relative to Japanese goods.  As a result, we see the South Korean ETF trading at low levels:

The weekly chart shows that prices have broken the uptrend that connected the 4Q11, 2Q12 and 1Q13 market lows.  Prices are below the 200 day EMA with declining momentum and a weak CMF reading.

Bank of Japan Sees Brighter Economic Picture

This is from the Bank of Japan's latest policy statement.  I've broken out the individual points.

Japan's economy is starting to recover moderately. As for overseas economies, while the manufacturing sector continues to show a lackluster performance, they are gradually heading toward a pick-up as a whole. 
  • In this situation, exports have been picking up. 
  • Business fixed investment has stopped weakening and shown some signs of picking up as corporate profits have improved. 
  • Public investment has continued to increase, and the pick-up in housing investment has become evident. 
  • Private consumption has remained resilient, assisted by the improvement in consumer sentiment. Reflecting these developments in demand both at home and abroad, industrial production is increasing moderately.
  •  Business sentiment has been improving. Meanwhile, financial conditions are accommodative. 
  • On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is currently 0 percent. 
  • Some indicators suggest a rise in inflation expectations.

Market/Economic Analysis: Is Spain Turning the Corner?

Spain has been a basket case for over two years now.  However, recent news indicates the economy may at least least stabilizing.  From the latest Markit services PMI:

The Spanish service sector moved closer to stabilisation in June as rates of decline in activity, new business and work-in-hand all slowed. There was also a marked improvement in optimism during the month. That said, employment continued to fall at a marked pace. Meanwhile, the rate of input cost inflation was only marginal and companies lowered their output prices again.

The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – rose for the second month running to 47.8 in June, from 47.3 in the previous month. This indicated a modest reduction in activity that was the slowest in the current sequence

Here's a chart of the data:

The blue line shows the index.  While it has been negative for over two years, recent moves show it rising, approaching the 50 line.  Also note that its level - while negative -- has been stable for the last 6 months.  I realize this is second derivative analysis, but that's how these type of trends start.

And Spanish manufacturing is now right at 50:

June provided further signs that the decline in the Spanish manufacturing sector is coming to an end.  New orders increased, driven by a marked rise in new business from abroad. Meanwhile, output, employment and purchasing activity all decreased at weaker rates.

The seasonally adjusted Markit Purchasing Managers’ Index® (PMI®) – a composite indicator designed to measure the performance of the manufacturing economy – posted 50.0 in June, signalling no change in business conditions during the month. This followed a reading of 48.1 in May, and ended a 25-month sequence of deteriorating operating conditions.

The chart shows a sharp increase over the last few months, which is a very encouraging sign.

The rise is largely the result of an export boon, caused by its lower labor costs:

For countless Spanish companies, and for the national economy as a whole, exports have emerged as the one bright spot in a country scarred by soaring unemployment and a plummeting demand from consumers, corporations and the government alike. Shipments of construction materials, car parts, Rioja wine, textiles, machinery and complex software are all booming, amid claims that Spain’s only hope of recovery is to export itself out of the crisis.

Recent data shows that Spain has indeed gained ground in world markets since the start of the crisis. Exports are now growing even faster than shipments from Germany, Europe’s economic powerhouse. According to the latest forecast by the European Commission, exports from Spain will grow by 4.1 per cent this year – the biggest increase of any country in the EU.

Spain’s exporting prowess looks even more impressive when viewed in the long term. Despite the economic rise of countries such as China, India and Brazil, Spanish exports as a percentage of world trade held almost steady between 1999 and 2012 – while those of the eurozone taken together fell from 33 per cent to 25 per cent.

There are still plenty of problems holding the economy back -- record high unemployment and a banking system that is still trying to stabilize.  This is shown in the latest leading and coincident indicator data:

Month to month declines are outlined in red.  The good news on the chart is the leading indicators, which have increased for all but one of the last six months.  In contrast, the coincident indicators have been steadily declining for the last six months.  The breadth of these downturns is shown below:

Click for a larger image.

Notice the breadth and depth of the declines in the coincident indicators.  These are not encouraging and don't show much sign of a turnaround anytime soon.

The long-term trend in these charts is shown below:

While the markit numbers are encouraging, they are all still in the early stages of the expansion.  In addition, the coincident economic indicates are extremely discouraging.  Let's turn to the Spanish ETF

The Spanish ETF has been trading between 27 and 32 since the beginning of the year, using the 200 day EMA area as technical support.  The low interest rate environment is keeping equity shares high.  There really isn't much of a trade here unless the market moves below 27 or above 32.

Wednesday, July 10, 2013

Conservative Blogs Ignore Positive PMI Data -- Unexpectedly!

Last months PMI data was an economic shot heard round the conservative blogsphere.  Ed Morrissey of Hot Air wrote:

As the numbers show, this isn’t much of a slide.  The problem is that manufacturing hasn’t been performing strongly in the first place.  As with the overall economy, it’s been stagnating rather than expanding, and the gap between expectations and contraction was already quite small.

Of course, he was wrong in his analysis as manufacturing had been expanding at a solid pace since the end of the recession.  In fact, it was manufacturing that helped to pull the US out of the recession.

And who could forget John Hinderakers analysis, which I took apart in this post.

Of course, neither noted that the Markit number was still in expansion.

Last month's PMI showed a rebound into positive territory:

"The PMI™ registered 50.9 percent, an increase of 1.9 percentage points from May's reading of 49 percent, indicating expansion in the manufacturing sector for the fifth time in the first six months of 2013. The New Orders Index increased in June by 3.1 percentage points to 51.9 percent, and the Production Index increased by 4.8 percentage points to 53.4 percent. The Employment Index registered 48.7 percent, a decrease of 1.4 percentage points compared to May's reading of 50.1 percent. Manufacturing employment contracted for the first time since September 2009, when the index registered 47.8 percent. The Prices Index registered 52.5 percent, increasing 3 percentage points from May, indicating that overall raw materials prices increased from last month. Comments from the panel generally indicate slow growth and improving business conditions."

Also note the internals of the report, which showed a strong increase in production and new orders.

It's been a full week since this report, and there has been nary a word from any the esteemed writers on the right of the news.

So -- why is this lack of news important?  Simple.  These individuals want their economic analysis too be taken seriously.  Yet they ignore data that doesn't fit their preconceived narrative.

Real average monthly wages

- by New Deal democrat

I've been following up with research as to the issue of stagnating vs. declining real wages. Last week I described 4 measures of real, inflation adjusted wages, three of which were average, or mean, measures, and one of which was a median. All 4 showed stagnating to slightly rising wages since the turn of the Millenium.

Meanwhile, last week Doug Short published a measure of "hypothetical" average real annual wages, by multiplying average wages adjusted for inflation for non-supervisory personnel by the average work week, and then again x 50 weeks. The measure is hypothetical because varying workweeks and layoffs can confound the data. But if we report on a monthly basis, those confounding issues almost totally disappear. Here's what real average monthly wages look like:

This shows that the average real weekly wage earned has also generally stagnated after rising during the great recession due to the sudden decline in gas prices in late 2008. The decline from late 2010 through late 2012 is again almost totally due to the subsequent rebound in gas prices.

But we still want to see what median wages look like, that is, the number where half of workers earn more, and half earn less. That will be the subject of my next post on the subject.

Brazil ETF Sees Massive Sell-off

The daily chart (top chart) shows that prices broke through key support at the 48 and 50 price level at the end of May and beginning of June.  Since then, prices have dropped to around the 42 level, or a move lower of ~12.5%.  There's been a marked uptick in volume on the first leg lower, although this decreased on the second move down -- a possible indication that the selling is over.  The lower EMAs are now below the 200 day EMA and momentum is very weak.

The weekly chart (lower chart) is now at a three year low.  All the underlying technical indicators are weak as well -- the MACD is declining and the CMF is negative. 

Markets initially reacted negatively to the Fed announcement that they would taper their asset buying.  But there are deeper issues with Brazil -- GDP is weak, inflation is running hotter than the central bank would like and their primary export market of China is slowing.


More Evidence of China's Changing Economic Policies

From Bloomberg:

China’s President Xi Jinping said officials shouldn’t be judged solely on their record in boosting gross domestic product, the latest signal that policy makers are prepared to tolerate slower economic expansion. 

The Communist Party should instead place more importance on achievements in improving people’s livelihood, social development and environmental quality when evaluating the performance of officials, the Xinhua News Agency reported June 29, citing Xi at a meeting on personnel management on the eve of the 92nd anniversary of the party’s founding. 

This is very important development and public statement, as it indicates that non-GDP measures will now be officially considered when assessing performance.  Note especially the environmental quality statement.  China is an environmental hazard zone.  They could probably subsidize and industry meant to clean up the pollution and get another 2%-3% growth for their GDP total.

Tuesday, July 9, 2013

Oil Breaks Through 98/99 Price level; Big Move On Monthly Chart

Perhaps more than any other market, oil is very susceptible to political changes.  Last week's news from Egypt made the oil market very concerned about the Suez Canal and the Middle East in general.  Hence the move higher.  However, the real move is seen on the monthly chart:

For the last two years, oil has been consolidating in a symmetrical triangle pattern.  Over the last month, prices have broken through upside resistance.  While the volume is weak, remember we've only seen one week of trading.   

Also remember that this latest move is based on political events, not fundamental.  Europe is still in a recession, China is still slowing and the US is still growing slowly.  In addition, we still have a strong supply position.   

Nate Silver on ECRI and economic forecasting

- by New Deal democrat

Nate Silver, the statistics wizard behind the PECOTA ranking system in baseball and aggregator of polls into an almost perfect prediction of the 2012 presidential election, recently wrote The Signal and the Noise: Why so Many Predictions Fail - but Some Don't. Via blogger Ashok yesterday, it turns out that he devoted a chapter to economic forecasting and specifically ECRI's now almost 2 year old "imminent recession" call:
In September 2011, ECRI predicted a near certainty of a “double dip” recession. “There’s nothing that policy makers can do to head it off,” it advised. “If you think this is a bad economy, you haven’t seen anything yet.” In interviews, the managing director of the firm, Lakshman Achuthan, suggested the recession would begin almost immediately if it hadn’t started already. The firm described the reasons for its prediction in this way: “ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading index…. to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact the most reliable forward looking indicators are now collectively behaving as they did on the cusp of full-blown recessions.” There’s plenty of jargon, but what is lacking in this description is any actual economic substance. Theirs was a story about data – as though data itself caused recessions – and not a story about the economy.
I would hate to be the example Nate Silver decided to use of a statistical faceplant. (Ask Gallup.) If the Hitler "Downfall" parody didn't do so, this is pretty much the official declaration that ECRI blew the call.

Beyond that, I also agree with Ashok's criticism of Silver's analysis above:
I think there’s a disservice in not considering the epistemological impossibility of forecasting recession, quite to the contrary of [the above] passage:
... Silver agrees that the best forecaster is one who gets it right. Rationally, the goal of any good forecaster is to be trusted and serve as an important source of information for clients. As far as economic predictions go, the client is of course the free market. Here’s the problem, let’s say I’m a trusted forecaster and I publish a report stating that the American economy will shrink by 4% next quarter. If people trust me, my report will have caused a recession. Why? Because business operations across the country will [scale back now in anticipation of the forecast recession].
Neither I nor any human being in the last 10,000 years had to know what the laws of physics were in order to predict that the sun will rise in the east tomorrow morning. A sufficiently reliable pattern in the data is enough.

The fact is, economic forecasting only works to the extent that the forecaster is the proverbial fly on the wall. Any forecast of any result that depends upon subsequent human behavior is subject to the fact that humans are able to react to the forecast itself. Think of Ebenezer Scrooge and the Ghost of Christmas Future. (Or "Babylon 5:" "Whatever you do, John, DO NOT GO TO ZA'HA'DUM!") If an economic forecaster became widely known as 100% accurate, their forecast would cause people to change their behavior immediately if possible. Thus the forecast of what was to come in 3 or 6 months would likely become a "forecast" of something that happened immediately instead.

So my blogging is ironically subject to the fact that I know that you, my dear reader, are a member of a, shall we say, very select group!

As for ECRI, I think their blown September 2011 call was due to their own human failure to see that the steep sudden fall in the data in summer 2011 was largely a reaction to the debt ceiling debacle. This was a political cause that could be, and was, reversed politically.

Market/Economic Analysis: Japan

Recent news out of Japan has been positive, as recently noted on the FT Alphaville blog:

A recovery in industrial production and consumer spending points to above-trend growth in Q2. Consumer price inflation may soon make a brief appearance above zero on the back of higher energy and import prices. But deflation isn’t beaten yet. The splurge of Japanese data overnight confirms the overall positive trend in the economy. Notably, industrial production increased by 2% in the month of May, the fourth consecutive monthly increase. Output in May was boosted by electronic components and machinery in particular. Both industrial production and exports are now on an upward trend (see chart below). To a large extent this recovery is due to the weaker yen. Although the yen is above its recent lows against the US dollar, it is still 19% lower than last November.

... the fall in the yen has coincided with an equity market rally. This, plus an increase in inflation expectations triggered by aggressive monetary ease from the Bank of Japan, is also helping to boost consumer spending. For May household spending data show a 0.1% monthly gain, while retail trade data were up by 1.5%. Both are on an upward trend and will support another quarter of fairly robust GDP growth in Q2. Meanwhile headline CPI inflation was -0.3% in May, up from -0.7% in April.

Higher energy prices are contributing to less deflation. Electricity prices are up 8.7% over the last 12 months, the fastest rate in over 30 years. Higher import prices as a consequence of the weaker yen may push national CPI inflation slightly above zero in coming months. But of course this would not herald the end of deflation as underlying pressures remain deflationary.

And that's not all.  The latest data from the Tankan business survey shows that business confidence is on the rise.  The latest coincident economic indicators may be signaling a possible turning point and the Conference Board's leading indexes are all rising:

The Conference Board LEI for Japan increased again in April, its fifth consecutive gain. Stock prices and the Tankan business conditions survey both made large positive contributions this month. Between October 2012 and April 2013, the LEI increased 6.1 percent (about a 12.5 percent annual rate), sharply up from the decline of 5.0 percent (about a -9.7 percent annual rate) during the previous six months. Moreover, the strengths among the leading indicators have remained very widespread in recent months.

Eight of the ten components that make up The Conference Board LEI for Japan increased in April. The positive contributors to the index – in order from the largest positive contributor to the smallest – include stock prices, the Tankan business conditions survey, the six month growth rate of labor productivity, dwelling units started, real operating profits*,  the interest rate spread,  real money supply, and the new orders for machinery and construction component*. The negative contributors include the index of overtime worked and (inverted) business failures.

Also note bank lending has hit a four year high:

Japanese bank lending marked its biggest annual increase in four years in June, suggesting the central bank’s aggressive monetary stimulus and brightening economic prospects are spurring fund demand for fresh investment.
Outstanding loans held by Japanese banks rose 1.9 per cent in June from a year earlier, Bank of Japan data showed on Monday, marking the 20th straight month of increase and posting the biggest gain since July 2009.

Let's turn to the markets:

From mid-May to early June the Japanese ETF sold off about 17%, largely thinking that the rally was a bit overdone.  However, prices have since stabilized, trading between 10.25 and 11.25, also using the 200 day EMA as technical support.  The decreasing volume tells us the sell-off is probably done for now, while the MACD is rising and is now in positive territory.

The yen rallied to just below the Fib fan from mid-May to mid-June, but has since fallen back.  Expect a second test of the 94 level within the next few weeks.

Monday, July 8, 2013

Three quick hits about June employment

. - by New Deal democrat

Here are three items about June employment that you may not have seen elsewhere, and deserve wider exposure:

1. Gallup's employment survey shows the positive but slow progress over the last four years:

Note that the numbers shown are for the month of June each year. Gallup's polls are not seasonally adjuster. You can see that the number of employers not changing their workforce has returned to normal, the number firing has fallen to almost but not quite its pre-recession levels (confirming the weekly jobless claims trend), but the number of employers hiring, while it has risen to June 2008 levels, still has a way to go.

2. From Catherine Rampell of the NUY Times: that big increase in involuntary part time employed may not have been primarily about Obamacare at all. It may instead show the impact of the Sequester:

Not seasonally adjusted, almost 150,000 Federal workers became involuntary part-time employees, about 90,000 more than in either of the prior two years. The seasonal adjustment reduces about 20% of the number, which still leaves us with about 120,000 involuntarily part-time Federal workers, seasonally adjusted. That obviously isn't all of the number, but on top of the usual number, it may well be bigger than any other element of the newly part time in June.

3. Also from Catherine Rampell, the New York Times had an interesting graph, derived from the household survey, of what becomes of the newly unemployed during the next month:

The number remaining unemployed is still far higher than the equivalent number during the recoveries after the last several recessions. The number getting employment quickly has still not returned to normal. These probably would be expected.

What was less expected is the relatively steep decline in those who simply drop out of the work force. This has almost returned to its pre-recession number and suggests that we are in the part of the cycle where the unemployment rate increases due to people re-netering the work force.

Market/Economic Analysis: US

Let's look at last week's major economic announcements.

The Good

ISM's manufacturing index rebounded: ""The PMI™ registered 50.9 percent, an increase of 1.9 percentage points from May's reading of 49 percent, indicating expansion in the manufacturing sector for the fifth time in the first six months of 2013. The New Orders Index increased in June by 3.1 percentage points to 51.9 percent, and the Production Index increased by 4.8 percentage points to 53.4 percent. The Employment Index registered 48.7 percent, a decrease of 1.4 percentage points compared to May's reading of 50.1 percent. Manufacturing employment contracted for the first time since September 2009, when the index registered 47.8 percent. The Prices Index registered 52.5 percent, increasing 3 percentage points from May, indicating that overall raw materials prices increased from last month. Comments from the panel generally indicate slow growth and improving business conditions.""

Internally new orders, exports and production index ticked up into positive territory.  The anecdotal comments also pointed to a fairly decent underlying picture.

ISM services also posted solid growth: "The NMI™ registered 52.2 percent in June, 1.5 percentage points lower than the 53.7 percent registered in May. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 4.8 percentage points lower than the 56.5 percent reported in May, reflecting growth for the 47th consecutive month. The New Orders Index decreased by 5.2 percentage points to 50.8 percent, and the Employment Index increased 4.6 percentage points to 54.7 percent, indicating growth in employment for the 11th consecutive month. The Prices Index increased 1.4 percentage points to 52.5 percent, indicating prices increased at a faster rate in June when compared to May. According to the NMI™, 14 non-manufacturing industries reported growth in June. Respondents' comments are mixed about business conditions depending upon the industry and company. The majority indicate that growth has been slow and incremental; however, it is still better year over year."

Of note in the report is the decrease in new orders and production.  While both are still performing at expansion levels, they did drop.  Some of the drop may be simply due to the standard summer slowdown that occurs in businesses.

Construction spending was up .5% M/M and 5.4% Y/Y.  The increase was broad based, coming from residential, non-residential and public spending.   For more, please see this post at Calculated Risk.

Motor vehicle sales came in strong, with all US all US car companies reporting increases.  For more, see this post from NDD.

Factory orders increasedNew orders for manufactured goods in May, up three of the last four months, increased $9.9 billion or 2.1 percent to $485.0 billion, the U.S. Census Bureau reported today. This followed a 1.3 percent April increase. Excluding transportation, new orders increased 0.6 percent. 

The employment report was very strong.  See these posts (here and here) from NDD.

The Neutral 

The trade report was neutral.  Will imports increased (indicating an increase in domestic demand) exports decreased indicating slowing international economies. From the report: The April to May decrease in exports of goods reflected decreases in consumer goods ($1.2 billion); industrial supplies and materials ($0.9 billion); and foods, feeds, and beverages ($0.1 billion). Increases occurred in capital goods ($0.8 billion); automotive vehicles, parts, and engines ($0.3 billion); and other goods ($0.2 billion)....The April to May increase in imports of goods reflected increases in industrial supplies and materials ($1.0 billion);
consumer goods ($1.0 billion); automotive vehicles, parts, and engines ($0.8 billion); other goods ($0.5 billion); foods, feeds, and beverages ($0.4 billion); and capital goods ($0.3 billion).

The Bad


Conclusion: the numbers this week were solid.  Both the manufacturing and service industry reports show expansion.  Construction spending is decent, which tells us the housing recovery continues as we move forward.  The employment report was very good -- especially the upward revisions, while car sales totals indicate consumers are buying autos at a strong pace.  In short, the economic backdrop is remarkably strong.

Let's turn to the markets, starting with the SPYs:

The daily SPY chart (top chart) shows that since the end of May, prices have been moving lower, but in a very disciplined manner.  They've dropped from 167 to about 162.5 -- a move lower of about 2.7%.  Momentum has clearly dropped as and the CMF.  However, the lack of a strong, protracted move lower indicates that traders are most likely taking profits from the post January 1 rally and waiting for the next big move in the markets.

The 30 minute chart (bottom chart) shows that last week there was in fact very little price action.  Prices in general traded in a two point range before moving higher in Friday in very weak action.

The treasury market continues to sell-off.  The daily chart (top chart) shows a very bearish chart.  All the shorter EMAs are moving lower, following prices.  Momentum is weak and money is flowing out of the market.  The weekly chart (bottom chart) shows that prices are right at top Fib level support.

The dollar has been moving higher since mid-June.  However, it is still trading between 21.5 and 23.2.

The week ahead: we're now in the middle of summer, so expect the summer doldrums to hit trading.  In addition, the markets are still trying to understand and apply the Fed's announcement that they'll taper their asset purchase program. In response, we've seen a sell-off in both the treasury and equity markets.  Yet the underlying economic news has been strong, which should be supporting stocks.

Sunday, July 7, 2013

A thought for Sunday: Dear Professor Krugman, I think you have your causality reversed

- by New Deal democrat

[You know the drill. Regular nerdy economic blogging will resume tomorrow.]

A few days ago, Paul Krugman lamented that overwhelming data that austerity was a failure hadn't pushed political elites to more forceful action:
I’ve been having a strange reaction to recent news about economic policy. Stuff is happening ... but ... it’s all pretty small-bore stuff.

And ... mass unemployment goes on.

... I think many of us used to believe that sustained high unemployment ... would push policymakers into doing something forceful. It’s now clear, however, that ... [w]e can probably have high unemployment and stable prices in Europe and America for a very long time — and all the wise heads will insist that it’s all structural, and nothing can be done until the public accepts drastic cuts in the safety net.
[my emphasis]

I've seen sentiments like this many times over the last four years. I think Brad DeLong has made the same lament a number of times, and Mark Thoma as well.

Respectfully, I believe the academics have their causality reversed. It isn't just chance that at the time that the worst and most persistent downturn in seventy years happened, the response thereto has been stymied by the conservative, "trickle down" economics embraced by the political and professional elites.

No. The worst and most persistent downturn in seventy years happened precisely because conservative "trickle down" economics was most fully embraced by political and professional elites.

That embrace caused the elites to push for and enact financial deregulation. That embrace cuased the elites to push for and embrace the evisceration of centuries of laws against usury (excessive consumer lending interest rates). That embrace caused the elites to ignore the burgeoning of debt by consumers and businesses alike. That embrace caused the elites to push for and enact statutes that made deep holes in the safety net (because lower benefits are needed to incentivize work). That embrace caused the elites to push for and embrace skyrocketing senior management compensation in corporations (because higher benefits are needed to incentivize work). That embrace caused the elites to push for the elimination of the estate tax after over 100 years (because higher inheritances are needed by the great great grandchildren of the wealthy in order to ... well, something or other, but it will incentivize them!).

In short, you simply do not get economic and financial crises like we have had in the last 5 years at a time when had the elites embrace countercyclical economic policies, and measures to protect and shore up the middle and working classes. By 2008, the elites in political, corporate, and academic power had a greater belief in "trickle-down" economic policies than had been the case in a lifetime, and as a result of that embrace, they had enacted policies which led to the inevitable debt crisis.

In 1933 there was a long and living record of this kind of economic downturn, and there was an infrastructure of political (big city machines), corporate (unions), and academic (Keynes and others) power centers to remove the existing elites from power. No such infrastructure exists now - although certainly an academic and grass roots architecture has been forming for the last 10 years. So it should be no surprise that the entrenched elites, well, ... want to remain entrenched, and are not about to be "push[ed] into doing something forceful."