Economic Notes – September 16, 2013


Written by: Jon McGraw

Economic data was being watched perhaps a bit more closely this last week with the Fed meeting upcoming and talk of the ‘taper’ hanging in the balance.

(-) Retail sales for August gained a meager +0.2%, which disappointed a bit relative to the expected +0.5% increase. Removing auto and gasoline components brought the core sales number to +0.2%, which still trailed the anticipated number by a tenth. On the positive side, June’s gain was revised upward by a tenth, although we’re talking about fairly small numbers all the way around. In August, apparel sales and building materials were disappointing, down almost a percent in the usually important back-to-school shopping and home construction seasons. On the positive side, autos and parts gained a percent, which explained the difference between the headline and core figures. Retail sales have been somewhat sporadic as they often are month-to-month, and have slowed as of late—although the more important twelve-month gain stands at +4.7%. This recent tempering of retail ‘consumerism’ may certainly be a factor in the Fed’s decision-making, being that consumers represent 70% of the economy.

(0) The headline Producer Price Index for August rose +0.3% (+1.4% year-over-year), which was just a tick above forecast. The core PPI was flat (+1.1% year-over-year), compared to an anticipated +0.1% rise. The difference between the two was entirely explained by gains in food and energy prices in the month. Similarly, import prices were flat in August, relative to an expected gain of +0.5%, with rising petroleum prices offset by falling capital and consumer goods imports. As seen by the year-over-year figures, inflation from these measures continue to appear subdued. The year-over-year decline of almost half a percent in import prices is especially low.

(0) Business inventories rose for July rose +0.4%, which was double the gain expected—this contains a total of individual manufacturing, wholesale and retail inventories. Retail as a component gained almost a percent, which is the largest increase in six months. Wholesale inventories gained only a disappointing tenth of a point, as a large drop in non-durable goods (farm product raw materials in this case) offset strength in durable.

(-) The Univ. of Michigan consumer sentiment survey dropped from August’s 81.1 to 76.8 for September in the early release—despite expectations for a small gain. Consumer assessments of present conditions and future expectations both fell, which could have been related to flatting of housing market indicators in recent weeks and/or higher interest rates, but Syria was also mentioned as a pessimistic factor. Inflation expectations rose a bit, to a median level of 3.2% for the coming year and 3.0% for the upcoming five years, although these remain well within traditional ranges.

(0/-) The NFIB small business optimism index came in flat for August, at 94.0, despite expectations for a gain to 95.0. Forward-looking categories in the index generally improved, such as hiring plans, sales and capex activity; while trends in current earnings worsened somewhat, as did expectations for the economy in general. Despite these sporadic readings, small business owners appears more optimistic than they have for some time (the readings are actually near a post-crisis high) but certainly lower than during other expansionary cycles. This is not a surprise, as small business owners have remained more skeptical and conservative for a variety of reasons.

(0) Initial jobless claims for the Sept. 7 week fell dramatically from the previous week to 292k—far below expectations of 330k. But wait, there’s a catch…two states weren’t able to file their numbers due to computer system upgrades (the states weren’t identified, but it’s likely one was Nevada). So, essentially, the entire report has to be thrown out. Continuing claims for the Aug. 31 week came in at 2,871k, which was lower than the 2,960k expected.

(0) The Federal JOLTS (Job Openings and Labor Turnover Survey) for July was mixed. Job openings declined to 3,698k from an expected 3,900k, and the hiring rate was unchanged at 3.2% of employment. However, the layoff/discharge rate fell a tenth to 1.1% (equaling a record low) and the ‘quit rate’ rose a tenth to 1.7%—which, if it continues, could demonstrate an increasing level of job-seeker confidence (more willing to quit their jobs for better ones).

Lastly, many want to know what the Fed is going to do this coming week (taper or not to taper). Naturally, it isn’t a question of if, but when, and how much. A quick non-scientific survey of economists we review regularly puts even money on September and December, although slightly in favor of the sooner meeting. In terms of magnitude, the amount taper could be in the $10-15 billion range—and likely focused on the Treasury purchases (which currently total $45 bil./month) as opposed to the MBS buys ($40 bil./month) which are arguably more directly impactful to consumers in the form of lower mortgage rates.

Market Notes

U.S. equities were higher, with the Dow posting its second-best week of the year. The improved sentiment was partially the result of improved economic data from China and diminished risk of a Syrian attack. While all sectors were positive, industrials and telecom performed best on the week, while utilities and technology came in last. The latter wasn’t helped by weak performance from Apple, due to less than an enthusiastic response over the new iPhone releases.

In the DJIA, the highlight of the week was the announcement of a reconfiguring of three names (10% of the index)—the removal of Alcoa, Hewlett-Packard and Bank of America and additions of Nike, Visa and Goldman Sachs. This change goes along with a steady progression of the index from a heavy-industry to a consumer goods and service-based group, in keeping with the evolution of the U.S. economy in recent years. Since the Dow is price-weighted (we won’t delve into the unusualness of that index construction, but will leave it as ‘historical legacy’), stock prices that get too low are often those to be removed. Unsurprisingly, as with the S&P, stocks booted out have often subsequently performed better than those included (which are more popular at the time).

Strength in foreign markets came from the areas investors found most distasteful over the past few weeks, including India, Indonesia, Turkey and Poland—emerging markets which all struggled for a variety of internal reasons but gained 5% or more on the rebound week. As bad as things have been looking in India, their industrial production number showed a surprising increase, so the index gained almost 10% in just a few days from a low point last week. China also reported strong industrial production, export and retail sales numbers, which helped all countries in the region. Elsewhere, the U.K. unemployment rate fell and economy has surpassed poor expectations this summer. All-in-all, generally all nations were positive on general ‘risk-on’ sentiment.

Bonds gained a bit with the mixed economic data—slightly lowering probabilities of a September taper. Developed market bonds gained the most strongly (up a percent generally), followed by MBS, TIPs and other long Treasuries. However, investment-grade corporates, high yield and floating rate were also positive. The individual highlight of the week happened to be the $49 billion raised by Verizon, which was the largest corporate bond deal to date (surpassing Apple’s $17 billion in April), intended to facilitate the purchase of the remaining U.S. wireless business from Vodafone. There certainly wasn’t a problem with demand, as the issues were oversubscribed by 2x, with the average yield at just over 5% (more than Apple had to pay).

REITs also rebounded, along with global equities. Asian REITs and U.S. residential issues were the best performing on the week, followed by European issues. U.S. industrial/office and retail represented the weakest sectors, but still performed positively.

Commodities were a bit weaker on the week on average. The biggest gains were in natural gas and soft commodities, such as coffee, cotton and cocoa. Crude oil prices fell roughly two percent with the risk of U.S. military action in Syria dissipating. In like manner, the decrease in uncertainty led to a pare back in pricing for gold and silver.

Have a great week!