Market/Economic Analysis: US

Let's start with a review of last week's news.

The Good

Producer prices came in at .8%: The Producer Price Index for finished goods increased 0.8 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods rose 0.5 percent in May and fell 0.7 percent in April. At the earlier stages of processing, prices received by manufacturers of intermediate goods advanced 0.5 percent in June, and the crude goods index was unchanged. On an unadjusted basis, prices for finished goods moved up 2.5 percent for the 12 months ended June 2013, the largest 12-month rise since a 2.8-percent increase in March 2012.

Frankly, we needed this bump in the M/M numbers.  Consider this chart of the year over year percentage change in PPI:

The year over year rate was declining and getting uncomfortably close to 0%.


The Neutral

The National Federation of Independent Business reported that the optimism index dropped.  Small-business optimism remained in tepid territory in June, as NFIB’s monthly economic Index dropped just under a point (0.9) and landed at 93.5, effectively ending any hope of a revival in confidence among job creators. Six of the ten Index components fell, two rose and two were unchanged. While job creation plans increased slightly in June, expectations for improved business conditions remained negative. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months.

Here's a chart of the data:

  
Notice this number has been in a depressed state for the entire duration of this recovery for two primary reasons.  First, is depressed demand and the second is the implementation of the ACA, for which we're now just getting initial guidance.

Import prices dropped for the fourth straight month: Prices for U.S. imports decreased 0.2 percent in June, the U.S. Bureau of Labor Statistics reported today, following a 0.7 percent decline in May. In June, a drop in nonfuel prices more than offset increasing fuel prices. The price index for U.S. exports edged down 0.1 percent in June, after a 0.5 percent decrease the previous month.

The reason I'm now putting this in the neutral column is I think the possibility of deflation is starting to become more real and this print -- and the four months of decreases -- is a nit unnerving. 


The Bad

none

Conclusion: last week's data picture was light, so it's difficult to get a meaningful read from the data.

Let's turn to the markets:

On the daily chart (bottom chart) I've highlighted the last two week's price action which is better shown in the 30 minute chart (top chart).  Notice that we've had strong inter-day movements, but weak price action during the trading session.  Part of this can be explained by the "summer doldrums" -- weak trading as traders take their summer vacations.  However, it's also occurring as the market is approaching previously attained highs,  Ideally, we'd like to see stronger bars on higher volume print at this time, as this would indicate there is a fair amount of momentum and excitement about the rally.

The belly of the treasury curve (3-7 years, IEIs top chart; 7-10 years; IEFs, bottom chart) rebounded last week.  The primary reasons was higher yields attracted central bank buying, as noted by Marketwatch:

The 3-year note now yields more than twice as much as its 2013 closing low of 0.295%, hit May 2. On Tuesday, the notes sold at a yield of 0.719%, the highest sale price since June 2011.

Buyers offered to buy 3.35 times as much debt as was for sale, more than the 2.95 cover recorded last month but below the 2.50 average during the last year.

Indirect bidders, which can include foreign central banks, took down 35.6%, well above the recent average of 26.8% during the previous year. Recent auctions of other maturities have seen similarly strong indirect bids. Direct bidders, which can include domestic money managers, bought 13.0%, below the average of 18.1%. 

 
The dollar chart shows that we're still in a fairly price range at the low end of prices for the last few years.  Until we see a move below ~21.5 or above ~23, there isn't much to report.

Market/Economic Analysis: US

First, let's review last week's economic news:

The Good:

First, import prices declined: Prices for U.S. imports declined 0.6 percent in May, the U.S. Bureau of Labor Statistics reported today, after a 0.7 percent drop the previous month. Falling fuel and nonfuel prices contributed to the decreases in both months. U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March.  What's interesting here is that non-fuel imports have also been dropping.

Retail sales increased .6%: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $421.1 billion, an increase of 0.6 percent (±0.5%) from the
previous month, and 4.3 percent (±0.7%) above May 2012. Total sales for the March through May 2013 period were up 3.7 percent (±0.5%)
from the same period a year ago. The March to April 2013 percent change was unrevised from 0.1 percent (±0.3%)*. 

This is by far the best news of the week.  With manufacturing slowing consumers will have to provide more economic activity to keep the economy moving forward.  This report indicates they're more than up to the task.  Equally impressive was the .3% increase ex-autos. 


Neutral

Producer prices are right on the edge of being a concern for a one-month print. The Producer Price Index for finished goods rose 0.5 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.7 percent in April and 0.6 percent in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.1 percent in May, and the crude goods index advanced 2.2 percent. On an unadjusted basis, prices for finished goods moved up 1.7 percent for the 12 months ended May 2013. 

Regarding PPI, most of the increases are due to large movements of single products that make up an index.  For example, fuel prices account for 60% of the increase in finished goods while a 41.6% increase in egg prices is responsible for over 60% of the increase in finished consumer foods.  Also note that 2/3 of the increased in the finished core prices are attributable to a .4% increase in light trucks and autos.  It's entirely likely that the prices related to eggs and autos are one-off events.  Energy is a bit more volatile, but there isn't much demand pull or price push pressure right now. 

There is no way anyone can say that inflation is an issue or even a potential issue in the current environment.  However, bigger moves in a single month's print of an inflation statistics is something to keep your eye on going forward.

Industrial Production was unchanged: Industrial production was unchanged in May after having decreased 0.4 percent in April. In May, manufacturing production rose 0.1 percent after falling in each of the previous two months, and the output at mines increased 0.7 percent. The gains in manufacturing and mining were offset by a decrease of 1.8 percent in the output of utilities. At 98.7 percent of its 2007 average, total industrial production in May was 1.6 percent above its year-earlier level. The rate of capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent, a rate 0.2 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972–2012) average.  

The good news is the print wasn't negative.  The bad news it the print was just barely good.  And the .1% overall increase in manufacturing -- especially on the heels of two straight contractions -- is pretty concerning.  It does appear that external events like the global slowdown and the sequester are starting to take a bigger bite out of manufacturing.

The Bad 

US Export prices dropped: U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March.  Lack of pricing pressure indicates that exporters may be under profit margin pressure over the next 3-6 months.

Let's turn to the charts.

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The daily chart (top chart) shows that prices are using the trend line connecting the early January and mid-April lows as technical support.  The high from early April in the 159-160 and 50 area is providing support as tell.  The technicals are bearish: the shorter EMAs are entangled with prices, while the MACD and CMF is declining.

The top chart is the 60 minute prices chart and shows that prices are consolidating in a triangle pattern.

The big story in the bond market -- and all markets at large -- is when will the Fed start to taper off its bond buying program.  Last week, there was an emerging concensus it would be soon -- leading to the sell-off in the bond markets.  However, traders started to change their minds about that assessment, leading the bell of the treasury curve to rally above resistance.  As it stands right now, the IEIs still have support at 122 and the IEFs at 105.

The dollar has broken support at the 38.2% Fib level with the new price target of ~21.5.  Any rally will hit resistance at the 10, 20 and 200 day EMAs as well as the 38.2% Fib level.

Market outlook for the week: slightly negative.  The dollar's drop indicates that traders are short-term bearish on the US, which is confirmed by Treasuries inability to make a sustained move below support. 

Market/Economic Analysis: US

Let's start with a look at the economic news of last week.

The good: The Case Shiller home price index increased 10.8% Y/O/Y and 1.38% M/O/M.  Putting it bluntly, housing is making a comeback.  While this price increase has been the basis for claims of a new housing bubble, NDD and I demonstrated that prices are not out of control relative to DPI and that the increase in price is really a function of declining inventory (see here and here).

The second estimate of US GDP printed at 2.4% for 1Q13.  Here's the money quote from the report:

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

The acceleration in real GDP in the first quarter primarily reflected an upturn in private inventory investment, an acceleration in PCE, a smaller decrease in federal government spending, and an upturn in exports that were partly offset by an upturn in imports and a deceleration in nonresidential fixed investment.

The Chicago PMI Increased from 49 to 58.7, a mammoth increase.  The internals for this report also increased at sharp rates. 

And finally, "The Thomson Reuters/University of Michigan final index of sentiment increased to 84.5 in May, the strongest since July 2007, from 76.4 a month earlier. The median forecast in a Bloomberg survey called for the gauge to hold at its preliminary reading of 83.7."


The Bad: While the Richmond Fed did increase, it moved from -6 to -2, meaning this region is still in a mild contraction.  Unfortunately, most of the internals are still negative as well.  The Texas manufacturing index is also printing at a negative level, moving from -15.6 to -10.5.  However, the internals of this report are better, indicating stronger moved ahead are possible. 

The worst piece of news came on the consumer front.  

Personal income decreased $5.6 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $16.1 billion, or 0.1 percent, in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $20.5 billion, or 0.2 percent.   In March, personal income increased $36.2 billion, or 0.3 percent, DPI increased $25.4 billion, or 0.2 percent, and PCE increased $14.2 billion, or 0.1 percent, based on revised estimates. 

Real disposable income increased 0.1 percent in April, compared with an increase of 0.3 percent in March. Real PCE increased 0.1 percent, compared with an increase of 0.2 percent.

Given that we're in an environment when unemployment is over 7%, this is to be expected.  However, there is only so far or fast an economy that is 70% based on consumer spending can advance when it prints income and spending numbers like those printed this month.


Let's turn to the markets.

Despite all the hand-wringing regarding Friday's close, the chart shows prices are simply in a downward channel.  There are several logical price targets for this downtrend: 160 -- the price level established in mid-April, the red trend line connecting early January and mid-April lows and 155, which is a Fib level.  The high volume and MACD indicate more downward moves are probable.

As I noted last week, the belly of the treasury curve is right at critical support.  The reason for the drop is investors and traders are now seriously considering the possibility of the Fed tapering off its bond buying program:

Treasuries recorded the steepest monthly loss since 2009 amid speculation the Federal Reserve could curtail its unprecedented monetary stimulus program if recent improvement in domestic economic data is sustainable. 

U.S. government debt tumbled 1.8 percent in the month through May 30, the most since December 2009, according to Bank of America Merrill Lynch index data. Yields extended gains yesterday after a report showed consumer confidence rose in May to the highest level since 2007. A government report on June 7 is forecast to show the U.S. added 165,000 jobs in May and the unemployment rate remained at a four-year low of 7.5 percent. 

The dollar retreated last week, falling through the 22.6 level established in March and finding support at the 61.8% Fib level.  The 50 day EMA is also providing technical support.  Also note the selling signal given by the MACD.

The dollar is considered a safe haven currency.  As equity markets are still getting attention, it makes sense that we'll see the dollar sell-off a bit.