Economic Notes – November 4, 2013
Since we’re no longer playing ‘catch-up’ with the economic data, there happened to be a lot of it.
(+) The Chicago PMI rose significantly higher over the past month, from September’s 55.7 to 65.9 in October (surpassing a forecasted flattish 55.0 level). Notably, this was the largest monthly increase in some 30 years. While no special/unusual factors were mentioned, the improvement originated from strong results in new orders and production, while employment was also up around 5 points (a strong showing in that struggling area). The exceptional results here are a bit in contrast to other regional Fed measures that haven’t kept up the same pace (some even coming in negative). So, it’s too early to get overly exuberant but it’s a step in the right direction.
(+) The ISM Manufacturing Index report also improved a bit from Sept. to Oct., from 56.2 to 56.4, which surpassed an expected deterioration to 55.0 and represents the highest level in 2½ years. The headline index was a big stronger than the details, as employment and production declined a bit, while new orders improved slightly and inventories scoring better. These two closely-monitored manufacturing indexes are indications of some improvement yet again and perhaps some traction from a skidding few weeks. The government slowdown also appears to have done little damage to the overall economy.
(0/+) Industrial production rose +0.6%, which outperformed the expected +0.4% gain. However, much of this was due to a 5% gain in the electric utilities sector, which tends to have more sporadic results, while manufacturing production was up slightly and led by auto assemblies. Removing autos, production was essentially flat. Capacity utilization rose to 78.3% for September, compared to the 78.0% anticipated. August business inventories gained +0.3%, on par with forecast, as were the underlying retail and manufacturing subcomponents. The rate of inventory accumulation has increased a bit since last quarter.
(0) Retail sales came in mixed to better, with the headline number negative at -0.1% for September versus expectations of no change. The more meaningful core figure, which excludes the more volatile components like gasoline, homebuilding and autos, and is used by the government to estimate consumer spending in GDP, gained +0.5%, which surpassed expectations by a tick. The difference was accounted for by a drop in auto sales. Otherwise, restaurants, food/beverage and electronics/appliances were up nearly a percent in the month, with sporting goods/hobby/music/books up half a percent as well. The underlying theme is stronger consumer behavior on the month in several areas, but now we approach the critical Holiday season where same store sales releases will be watched increasingly closely.
(+) U.S. auto sales for October picked up after the government shutdown caused a bit of apparent pent-up demand, up +10.6% for the month to 1.2 million cars/trucks. GM and Ford were both up in the 15% range, and included both regular passenger cars and trucks in the best-selling category. In fact, the industry is looking to have its best sales year in the last six. Foreign car sales were also up, but slightly trailed figures from the U.S. makers.
(0) Inflation was tempered yet again. Headline CPI rose +0.2% for September, which was on line with the forecasted increase, while core CPI only rose +0.12%, underwhelming the expected +0.2%. Year-over-year, the headline and core CPI numbers rose +1.2% and +1.8%, respectively, which are far below the long-term trend as well as the Fed’s intended target. In the details of the report, the small increase in the headline came from a less dramatic than normal seasonal decline in gasoline; in the core, primary residence and owners’ equivalent rent have both been rising for a few months, while apparel prices fell about a half-percent.
PPI, which is more directly tied to producer input costs and runs a bit in advance of CPI, fell -0.1% in September (a relative surprise, with the median forecast calling for a +0.2% increase), while the core PPI number rose on target at +0.1%. Food prices falling -1% for the month accounted for much of the difference. For the full year, finished good prices rose +0.3% and core prices gained +1.2%. More on the inflation situation below under the ‘question of the week.’
(+) The S&P/Case-Shiller home price index rose +0.93% for August, which bested a forecasted +0.63% gain, as home prices continue to roll along the road of improvement. The ‘sand state’ markets of Las Vegas, LA and San Diego gained +2% each, which continues the recovery leadership of the post-bust period. The year-over-year index change improved to +13%, which is the strongest since 2006 (interesting for perspective’s sake).
(-) Pending home sales fell -5.6% for September, which was a disappointment compared to the flat reading anticipated; actually, this was the worst decline since April 2011 and took the index back to its late 2012 level. All major regions dropped by 8-9%, except for the South, which fell just marginally and kept the overall number respectable. This weak pending number bodes poorly for existing home sales over the next few months.
(-) The Conference Board consumer confidence reading fell from September’s 80.2 to 71.2 in October (underperforming a consensus guess of 75.0). Consumer assessments of current conditions fell a few points, while future expectations dropped even more dramatically. The labor differential that measures job plentifulness also deteriorated a bit. Like the Univ. of Michigan survey, this likely had some tie-in to the frustration around the government shutdown, so has to be taken in context. Such frustration usually dissipates before too long and another issue will take its place.
(-) The ADP employment report showed a gain of +130k for October, which underperformed the median estimate of +150k. In addition, the September figure was revised downward by -21k down to 145k, closer in line to the government BLS number. Professional and business services job growth has been steadily weak, with a +20k gain last month, and financial employment fell -6k. Construction employment, however, gained 14k. Notably, the ADP series only covers private payrolls so the government shutdown effect wasn’t/won’t be reflected.
(0) Initial jobless claims for the Oct. 26 week fell from 350k to 340k (relative to a consensus prediction of 338k), as the California labor department has finally worked through its computer transition and claims backlog issues that were distorting numbers over the last few months. Continuing claims for the Oct. 19 week came in at 2,881k, higher than the 2,870k expected. (Federal worker claims for the Oct. 19 week fell to 14k, which are not captured in the main series, so this affect has been tapering off as well. Non-federal but related workers claims may still be playing a small role, but we also expect this effect to be lessening.)
We addressed this in the mid-week fed note, but the FOMC unsurprisingly made no changes to rates, nor did they make any tweaks or tapers to QE. No clues were left in terms of when tapering might begin, but we can summarize by saying that it’s data-dependent and has been pushed back to at least December (the next meeting—so the earliest it could happen, despite a lack of economic data being released before next month) or, perhaps more likely now, January or March 2014. Comments about the ‘tightening of financial conditions’ was removed, perhaps in a nod to rates retracing back after their summer peak. Since inflation has not shown signs of re-surfacing, a Fed led by Janet Yellen may well focus on the labor picture—the lackluster jobs recovery may postpone removal of QE quite yet. So, with the taper question pushed off, consensus for the first increase in the Fed Funds rate (the usual first step in monetary accommodation coming off) has hovered around the late 2015 to early 2016 timeframe.
U.S. stocks were largely flat during the week as a non-eventful Fed meeting created a bit of volatility mid-week and good industrial/manufacturing numbers noted above were just strong enough to get the S&P over the hump. More defensive sectors consumer staples and healthcare led with gains near or over 1%, while more cyclical financials and materials lost about 1% each.
Small-caps, which have been on a roll as of late, were especially taken down a notch last week on falling momentum. Technically, this might be something to watch but not a complete surprise due to their somewhat extended valuation. Speaking of risk, Twitter is set to roll out an IPO later this week and its reception could prove to be an interesting gauge of sentiment—at this point, the percentage of Americans who believe the shares sound appealing or not are roughly split. That said, the deal is a small one but the price talk has been increased.
Outside of the U.S., Japan lost about a half-percent while Europe lost -2% on news of slowing economic activity and extremely low inflation numbers—in fact the lowest in four years (at an 0.7% annualized rate). In emerging markets, China had a strong week, gaining over 3%, while India also rose. In China, optimism rose as speculation that the government will introduce additional measures to boost growth after a recent Communist Party meeting. This must be tempered of course, with concerns about the tightness of credit as related to continued housing price increases. Money market rates in China have continued to be volatile, and the government seems reluctant to give too much support (although it inject $2 billion in last week—so this reluctance has to be taken in context).
Bonds lost ground with higher rates. Floating rate was the only bond category with positive returns, while most short duration debt ended up flattish. International bonds in both developed and emerging markets lost ground on a roughly equivalent 2% rise in the value of the dollar.
Real estate experienced a negative week overall, along with most financials. The most tempered losses were in domestic industrial/office and retail as well as Asia, while European and U.S. mortgage REITs suffered the worst.
Commodity markets were generally down on the week. Natural gas lost nearly -8% in the five trading days based on benign/warm weather forecasts across the country over the next two weeks. Crude oil prices lost 3-4% for similar reasons, but more so due to reports of large stockpiles, which have grown almost 10% in the past month and a half and served to keep per barrel prices below the critical $100 level. Gold and silver prices struggled with weaker emerging market demand, inconclusive Fed commentary and tough competition from strong equity markets.
It might be interesting to note that, despite the decent returns over the past six months (S&P gained +6.3%), we are now leaving the ‘weak’ May through October period and moving into the ‘strong’ November to April period for equity returns.
Have a great week!