Economic Notes – October 7, 2013
(+) The ISM manufacturing index for September was a bit stronger than anticipated, rising from 0.5 points from August, coming in at 56.2 versus an expected 55.0. This is the highest point for the ISM since April 2011. The details weren’t quite as dynamic as the headline, with declines in new orders but better numbers from employment, production and inventories.
(-) Conversely, the ISM non-manufacturing survey was weaker than expected, falling from 58.6 in August to 54.4 for September, and fell short of an expected 57.0 reading. Business activity and employment both fell, as did new orders slightly, and there were no improving areas. This pushes the gauge back down towards the middle of its typical range of the past several years, but remains well above 50, which is an expansionary signal.
(-) The final September Markit PMI report was a bit weaker than expected, falling from 53.1 in August to 52.8 relative to an expected unchanged 53.1 figure. New orders and employment were down for the month, while output rose a bit.
(+) The Chicago PMI survey for September was slightly better than expected, at 55.7 vs. an expected 54.0—this was an increase of 2.7 points from August, so a decent reading and along the lines of what the ISM told us. Production and new orders rose, while employment fell—again, similar to the national data. Employment has continually been a sticking point in these surveys and appears to be having a hard time gaining significant and consistent traction.
(-) Unit motor vehicle sales for September came in at 15.2 mil. units, which fell short of the 15.6 expected. The domestic component also fell short, at 11.7 mil. compared to the anticipated 12.1 mil.—domestic drops were the primary group affecting the total. Some of this was apparently due to an early Labor Day, but other seasonal factors came into account.
(+) Initial jobless claims for the September 28 week were essentially unchanged, at 308k, which outperformed expectations of 315k, and, more importantly, claim reporting from states with computer changeovers appears to be back to normal. This release brought the closely-watched four-week moving average down (which of course includes those strange weeks of sporadic data, which have to be mentally discounted). However, everyone likes round numbers and when claims get below 300k, it generally means good things are happening—like better economic growth. Continuing claims for the September 21 week came in at 2,925k, which was a bit higher than the 2,805k expected, but also included some claims from California that were logged during system problems so missed the initial claims reporting completely. Too much detail perhaps, but these little things add up.
(-) The ADP employment report that serves as an appetizer to the big government release later in the week showed job gains of +166k, which underwhelmed the expectations of +180k. August jobs gain was revised down by -17k, so ended up being more similar to the government report of the month. In the details, job growth declined in a few different areas, including professional/business services, but improved in trade/transportation/utilities as well as construction slightly. Again, based on past experience, this can be interesting data, but doesn’t always fit well with the government BLS figures.
Sadly, those were our only employment pieces of the week. Due to shutdown, the government’s Bureau of Labor Statistics claimed to not have enough manpower to get these figures cranked out in time for the usual Friday morning employment situation release. If this is anything like the Jan. 1996 situation, these may come out in a few weeks, depending on the status of things in Washington. The claims numbers will continue to come out, however, as this is a separate division (currently running on a skeleton crew of 30 out of over 1,000 normal employees handling the stats).
The potential for government shutdown frightened markets on Monday, but the reality of the shutdown itself on Tuesday saw a decent market recovery. Then, more fear later in the week. We’re not sure the president is helping with language such as ‘Wall St. should be worried.’ We already discussed market reactions to this in prior events. From a sector standpoint, health care and materials performed best on the week by gaining about a percent, while consumer staples and industrials lagged by losing roughly a percent each—the general index being around zero net gain. Even more interestingly, Lipper reported that last week resulted in net outflows from equities (redemptions of almost $300 million)—the first such outflow in 39 weeks.
In foreign equities, emerging markets outgained developed markets, but recoveries by India and Turkey, as well as Malaysia, which have been under pressure as of late—but a large group of EM nations gained over a percent on the week. In developed markets, Italy fared well with a Senate confidence vote pointing to lessened political turmoil, while several European core nations such as Germany lost marginal amounts in keeping with the U.S. S&P. The U.K. and Japan lost ground on the week, which brought down the broader EAFE.
Bonds were also largely flat, with mixed performance across the yield curve, but long bonds losing ground on rates rising a small 2-5 b.p.—remarkably tame considering the government lockout and upcoming debt ceiling debate. International treasuries performed best with a small headwind of a weaker dollar, with high yield and MBS also performing positively. Only the longest bonds suffered worse than the flat week the bulk of bonds experienced.
Commodities were led by big gains in sugar and cotton. Sugar prices gained partially due to U.S. government purchases intended to ward off high inventories, diverting the sugar towards biofuel production (and taking a loss on the transaction). Crude oil also gained with concerns over a tropical storm in the Gulf of Mexico, but that partially corrected later in the week for a net gain of a percent. Oil prices also jumped on the news that the Southern portion of the Keystone XL pipeline, which is slated to move 700k barrels/day from Cushing, OK to Gulf Coast refineries, is nearly finished—which will help cut excess stockpiles. Slumping contracts on the week included gold, natural gas, lead and corn—all down 2%. One might have thought gold would do a bit better during this federal government issue, but gold’s reaction to events is extremely hard to predict.
Keep an eye on Congress and have a great week!