Economic Notes – June 17, 2013


Written by: Jon McGraw

(+) The highest-profile economic release of the week, May retail sales, were a bit higher than expected with a gain of +0.6% versus a forecasted +0.4% (including seasonal adjustments that first lowered April retail sales from +0.5%, to -0.1%, then revised them upward again to +0.2%). ‘Core’ retail sales, which removes the more volatile components and is used by the government in GDP calculations for consumer expenditures, gained +0.3%, which was as expected. Overall, the report was fairly balanced, with contributions from ‘general merchandise’ and online sales, while electronics and apparel declined a bit. Contributing to the headline number were gains in autos/auto parts and building materials.

(0) Wholesale inventories rose +0.2% for the month of April, matching estimates. Durable goods rose to a slightly higher degree than non-durables, but the differences were minor. Overall business inventories, which include manufacturing, wholesale and retail, rose +0.3%—matching expectations—while March’s number was revised lower by a tenth of a percent.

(+) Import prices fell -0.6% for May, versus an expectation of a flat result—bringing the year-over-year number to a -1.9%. As is often the case, the May decline was related to a fall in oil prices, but a few other components also declined in unison. Consumer prices fell -0.3% for the month (the biggest monthly drop in three years) due to a decline in health care product costs, and may translate into downward pressure on CPI.

(0) The Producer Price Index (PPI) rose +0.5% for May, which outgained expectations of a +0.1% increase. Core PPI rose +0.05% for the month, compared to a forecasted +0.1% figure, so not too far out of line. As seen by the differences in two measures, higher food and energy prices were the primary reason for the headline increase, while ‘core intermediate goods’ prices fell.

As seen by this measure and in the trend of prior months, inflationary pressures continue to be quite subdued—a positive for the ‘hawks’ worried about the potentially inflationary effects of continued monetary stimulus, but a mixed blessing for the ‘doves,’ who believe too little inflation is the byproduct of insufficient economic growth and has the potential for spiraling conditions negatively. This has been the battle for some time—as it often is.

(0) Industrial production was flat for May, compared to an expected +0.2% increase; a decline in utilities output explained the bulk of the difference. The manufacturing production component came in as expected with a slight gain—led by autos/auto parts and computers/electronics (both up around 1%), while machinery fell off about half a percent. Capacity utilization was also slightly lower than expected, coming in at 77.6% vs. 77.8%. The monthly industrial releases continue to show growth. Not as great as we’d like, but consistent with related data.

(-) The preliminary release of the University of Michigan consumer sentiment index fell a bit in June to 82.7, versus an expected 84.5. Consumer assessments of current conditions fell several points; however, future expectations improved somewhat (not an uncommon trend from the past year). Interestingly, lower-income households represented the bulk of the negativity. Inflation expectations for the coming year rose a bit to +3.2%, as did 5- to 10-year forward expectations—to +3.0%—but both figures are fairly ‘sticky’ and in line with long-term historical norms.

On a side note about this particular metric, it was reported this last week that the Univ. of Mich. provides co-sponsor Thompson Reuters the new data five minutes before its official release time of 10:00 AM local time—so that the figures can be selectively shared with certain paying clients (in fact, trading activity of the high-speed variety has been shown to increase dramatically around this time). Apparently, the university receives a million dollar a year for the advance detail and claims this is needed to keep the research coming. In conclusion, to quote many an economist: ‘There is no free lunch.’

(+) The NFIB small business optimism index rose 2.3 points in May to 94.4, which bested expectations of a 92.1 reading. The index is now within a fraction of a percent of its post-crisis high point, although it remains low from historical measures. Respondents expecting the economy to improve represented the biggest upward movement in the index, while optimism insofar as sales growth and expansion plans also improved. On the negative side, continued frustration with taxes, ‘red tape,’ and poor overall sales topped the list of complaints—few of which have changed in quite some time.

(+) The government JOLTs report for April showed gains in hiring rates (overall rate to 3.3%, and private sector rate to 3.6%) and the separation rate (to 3.2%), but job openings that were lower than expected (at 3,757k vs. 3,875k). The quits rate, rose a bit to 1.7%. However, all employment-oriented measures remain low compared to the more normal pre-recession levels. Hiring rates overall remain depressed—weaker than other employment indicators.

(+) Initial jobless claims for the June 8 week fell more than expected, to 334k, relative to the forecasted figure of 346k, with no special factors mentioned that contributed positively/negatively to the report. The four-week moving average trended down to 345k. Continuing claims for the June 1 week came in at 2,973k, which was a bit lower than the 2,978k expected—continuing their downward slide.

Market Notes

Stocks ended the week lower, largely as a result of investor fears about the Fed’s plans for the ‘tapering’ off of bond purchases. Interestingly, one would think positive news of the economy strengthening over the longer-term, necessitating a need for the tapering off of continued support would be a good thing—however, for shorter-term traders, it appears that it isn’t. The IMF also cut U.S. growth forecasts from 3.0% down to 2.7% for the 2014 calendar year and pushed out the timeline for better employment prospects—no surprise here as these forecasts usually lag everyone else, but markets still reacted.

Also of recent concern are potential earnings for the second quarter for U.S. firms. About eight out of ten companies in the S&P have offered negative guidance, and overall expected earnings growth is about 1.0-1.5% for the quarter. However, it wouldn’t be surprising to see actual results surpass these downcast estimates, resulting in positive ‘surprises,’ as so often happens in the odd world of quarterly earnings reporting. Third and fourth quarter results are expected to pick up a bit, getting us to an expected full year 2013 growth rate of 7.0-7.5%. Estimates for 2014 earnings growth currently stand in the 11.0-11.5% range.

Japanese GDP came in at a quarterly 4.1% pace, which was better than expected and pushed equities higher. Additionally, several mid-sized European nations led foreign stock gains on the week, such as Scandinavia, while Turkey also gained back some ground from the prior week amidst ongoing unrest and demonstrations. Greece lost the most ground (-8%) on the week, as MSCI lowered the nation from developed back to emerging market status.

In fixed income, yields dropped back from highs as investors moved to ‘risk-off’ behavior, benefitting most bonds. International treasuries fared best, with a weaker dollar, but long U.S. treasury bonds also feared well; in fact, most investment-grade and high yield bonds gained a quarter- to half-percent on the week. Much weaker areas included TIPs (with recent inflation results generally not pointing higher) and municipals (with a weak issuance calendar recently and a high profile default announcement from the City of Detroit made in an effort to leverage creditors and avoid bankruptcy). Of broader interest, S&P raised their credit outlook on treasury debt from negative to stable (rating remained unchanged at the second-highest available, AA+), which perhaps helped sentiment.

Emerging market debt had a decent recovery week but has certainly struggled in the last month or two. The short-term irony is the higher recent correlation between EM rates and U.S. treasury rates, but the underlying metrics are quite different. While investors of all types seem to be keeping their eyes fully focused on the Fed’s upcoming moves (and communication) as a potential gauge for global growth prospects, emerging markets have become increasingly come into their own (especially relative to many developed markets)—from the standpoint of underlying fiscal conditions, higher growth and improved central bank policy/inflation ‘control.’ While, still prone to liquidity-based pullbacks, EM debt has been embraced by an ever-increasing group of investors. It just hasn’t fully graduated yet.

In real estate markets, U.S. mortgage REITs gained, while Asian REITs fared the worst (down -4% on the week and not doubt related to concerns over Japanese stimulus).

Commodity markets were led by cotton, which moved higher on lower planting numbers and other foreign supply constraints. Crude oil gained 2% as well, representing the best-performing major commodity. Industrial metals were largely the losers on the week, with continued concerns about global growth. Other major groups were largely unchanged on a net basis.

Have a great week!