Weekly Economic Udpate

Posted on March 10, 2014 by LSAConnect

(+) The ISM manufacturing index rose from 51.3 in January to 53.2 in February, which beat expectations by about a point and reversed last month’s decline.  However, details were mixed with new orders and inventories up several points, employment flat and production down.  The trend of anecdotes describing bad weather conditions continued, particularly in orders and shipment logistics/deliveries, so it’s a good chance bad weather played a role again in the lackluster numbers, although that was improved over the previous months.

(-) The ISM non-manufacturing index, however, was weaker than anticipated, falling from 54.0 in January to 51.6 for February (expectations called for 53.5).  Weather seemed the culprit again, as several respondents mentioned as much—which removes some of the economist speculation at least and grounds it somewhat to reality.  Business activity and employment were both down, while new orders were up slightly on the month.  Inventories were unchanged, but as these aren’t seasonally-adjusted, imposing an adjustment resulted in a large decline.  Without telling the same story again and again, we wait another month with perhaps better weather conditions for more ‘normalized’ results.

(+) The final February release of the Markit PMI number showed a rise to 57.1, up +0.4 from the preliminary figure and +3.4 from January’s results.  Output and new orders gained by about 5 points each, and even employment was slightly positive.

(+) Construction spending for January also surprised, gaining +0.1% relative to a forecasted drop of -0.5%.  Residential spending rose +0.9%, while non-residential fell by -0.3%; private spending rose about a percent, while government spending fell nearly an equivalent amount—on par with an ongoing trend of weak government outlays.  On the negative but unsurprising side, the large drop in January housing starts due to weather may bleed into February and cause a continuation of choppy results.

(+) Personal income for January gained +0.3% for the month, which was a tick above forecast; however, it appeared there were several unusual factors behind it, including some Obamacare components, welfare/social security cost-of-living adjustments and military raises.  Consumer spending gained +0.4%, which more strongly outperformed expectations of +0.1%.  Services experienced one of the stronger recoveries in over a decade, which we presume to be somewhat weather-oriented—especially as the strongest was in household utilities.  The headline and core PCE price indexes advanced +0.1% on the month, which was as expected, and the year-over-year numbers rose +1.2% and +1.1%, both in the ‘tempered’ category.

(0) The revised nonfarm productivity number for the 4th quarter 2013 was bumped down from the initial 3.2% to 1.8% (expectations were for an adjustment down to 2.2%), resulting in a full year adjustment down from 1.7% to 1.3%.  Compensation growth grew at a 0.3% over the full year, which, compared to the 4% average for several years prior to the financial crisis, is also quite tempered.

(-) Factory orders for January were slightly weaker than expected, falling -0.7% relative to an expected -0.5% decline, as well as were revised lower for December by a half-percent to an even deeper decline.

(-) The ADP employment report showed lower job growth for February than expected, with a gain of +139k relative to an expected +155k.  Construction jobs rose +14k in this survey, which was first questioned as numbers often differ from the government version due to weather impacts and definitional nuances regarding how ‘time off’ is classified, but the government report came up with a similar figure.  The January ADP growth number was also revised down almost -50k to +127k, in line with other measures.

(+) Initial jobless claims for the Mar. 1 ending week fell to 323k, from 349k the prior week (estimates called for 336k).  Continuing claims for the Feb. 22 week also fell, to 2,907k, from 2,915k the prior week and lower than the 2,985k expected.  The Department of Labor mentioned winter storms as a source of recent claim volatility.

(+) The employment situation report for February was not as tainted by the weather as many expected, which made it a bit of an anomaly for the week.  Nonfarm payrolls rose by +175k, outperforming expectations calling for +149k, with gains in construction jobs in the order of +15k, as well as health/education services adding +33k and government jobs increasing +13k (all state and local, not federal).  The unemployment rate rose a tick from last month (and what was expected for this month) up to 6.7%, largely due to an unchanged labor participation rate.  Average hourly earnings rose +0.4%, which ended up being two times the expected change, bringing the year-over-year gain to +2.2%, and average weekly hours fell a tenth to 34.2—led by a half-hour decline in construction, which we presume is somewhat storm-related.

(0) The Fed’s anecdotal beige book that contains information from the various regional districts described activity as ‘modest to moderate,’ with weather being a commonly-mentioned situation nationwide (it was mentioned over 100 times in the release), mostly in the context of production/supply disruptions, utility outages as well as lower sales.  Nonetheless, 8 of the 12 districts reported improved growth conditions, with Chicago and Kansas City stable, while New York and Philadelphia showed weakness.

After the events of last week, it brings up the question of why Russia cares so much about the Ukraine in the first place, aside from historical cultural connections and a shared Soviet parental relationship for much of the 20th century.  It’s about geographic position, military access and energy.  Without going into too much about the military and strategic positioning component, Ukraine provides a physical ‘buffer’ between Russia and the rest of Europe.  This may not seem like a hugely relevant factor in recent years (until a few weeks ago), but considering the WWI and WWII dynamics Europe remains very cognizant of, this is considered strategically important, as is the Russian naval access to the warmer weather ports of the Black Sea and, hence, the Mediterranean.  This is also why Turkey cares about the outcome of this.  However, as importantly, it’s the oil/gas pipeline access that is critical, as Ukraine lies in much of the Russia-to-Europe route.  For Europe, access to energy is an important consideration; for Russia, the revenues from this trade.

One might also ask how the Ukrainian crisis can/could trickle down to the investment world and an asset allocation portfolio.  Aside from broader ‘risk-off’ sentiment (that we saw on Monday, which was somewhat reversed by Tuesday), Russia may well have more to lose than the Ukraine, as the latter is much smaller with fewer developed securities markets.  The Russian ruble fell dramatically, which raised imported inflation risks and prompted the central bank to raise interest rates by 1.5%, in the same vein as Turkey in recent weeks.  This affects bank and corporate balance sheets in Eastern Europe especially, but potentially much of Europe, as Russia is a primary destination for investment and an important trading partner.

Also, there’s the obvious potential commodity impact—as Russia’s key advantages lie in their vast abundance of natural resources, including oil and natural gas.  A shock to the supply (as a side effect of war, or Russia attempting to exert more control over exports) could cause some price volatility.  This could hurt the European recovery if it is severe enough and goes on long enough.  The U.S. wouldn’t be hurt quite as dramatically, due to our increasing degree of self-reliance on the energy front, but it could trickle over to global markets nonetheless.

Period ending 3/7/2014

1 Week (%)

YTD (%)
DJIA

0.84

-0.24
S&P 500

1.05

2.02
Russell 2000

1.75

3.59
MSCI-EAFE

-0.35

0.96
MSCI-EM

0.03

-3.59
BarCap U.S. Aggregate

-0.57

1.43

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.
12/31/2013

0.07

0.38

1.75

3.04

3.96
2/28/2014

0.05

0.33

1.51

2.66

3.59
3/7/2014

0.06

0.38

1.65

2.80

3.72
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Weekly Economic Update

Posted on March 3, 2014 by LSAConnect

(-) The second estimate of 4th quarter GDP was a disappointment, although many watchers expected as much—the initial estimate of +3.2% was revised down to +2.4% (a tenth lower than the expected revision).  The majority of the difference came from lower personal consumption expenditures (up +2.6% instead of the +2.9% expected), net exports and inventories—in roughly equal amounts.  On the positive side, business fixed investment gained a half-percent over the first measure.  There is one more remaining revision next month, but the +2.5% growth rate is right in line with trend over the past year; and is neither great nor terrible—it’s in line with positive, but tempered growth we’ve come to expect.  Similarly, the PCE price index, which is the GDP inflation component, was revised upward a few ticks to +1.3%, but that remains at +1.2% pace over the past year and is quite tempered as well.

For the current 1st quarter 2014, GDP estimates are running in a similar range of 1.8-3.2% or so (round if off to 2-3% if you like), with the inventory ‘payback’ component being the tipping point.  But we have some time for these to change.  Extreme winter weather impacts are likely, the amount of which is to be determined, but could be upwards of several tenths of a percent.

(0) Durable goods orders for January fell -1.0%, which was slightly better than the -1.7% expected drop.  The headline number was affected by a drop in civilian aircraft orders (Boeing specifically), which fell -20% and can be choppy; however, defense orders gained +23%.  Core capital goods orders rose +1.7% (vs. consensus expectations of a -0.2% drop), helped by gains in fabricated metal and computers/electronics—both over +5%.  Core shipments fell by almost a percent, but remained a few tenths of a percent better than expected.  While some December numbers were revised downward, this wasn’t a terrible report considering the negative expectations surrounding the winter season.  The shipments part may lower GDP for the first quarter a bit.

(+) The Chicago PMI for February came in better than expected, up a few ticks from 59.6 last month to 59.8—far better than the forecasted 56.4.  Despite the strong expansionary headline result, the underlying components were mixed, with new orders and production down a point or two, while employment rose by 10 points (which was quite dramatic).

(+) The FHFA house price index of conforming mortgaged-financed homes gained +0.8% for December, beating the median forecast of +0.3%.  Gains were widespread, including the West South Central (i.e. Texas) region that rose +2%, while the Mid-Atlantic and New England regions lost a half-percent.  The trailing 12-month gain is +7.7%.

(+) Similarly, the Case-Shiller home price index also rose +0.8% for December, compared to an expected +0.6% rise.  The biggest winners on the month were Miami, Detroit and San Francisco, which all gained just over a percent, while 19 of the 20 indexed cities (exception being Cleveland) gained ground.  Over the past year, the index is up +13.4%, which is substantial.

(-) Pending home sales for January rose +0.1%, but fell short of the +1.8% forecasted increase, but at least ended a half-year of declining results.  December’s growth was also revised upward by 3%, but remained sharply negative.

(+) New home sales for January rose +9.6% to 468k, which sharply outperformed the forecasted decline of -3.4%; additionally, the December number was revised upward a bit (by +3%, cutting the month’s decline in half).  Sales were widespread here as well, with the exception of the Midwest region, so the break in a few negative housing reports was welcome.  Again, housing statistics are depressed during the winter season, so it will require early spring results to show more consistency.

(+) The final University of Michigan consumer sentiment survey for February rose a bit from the initial and expected final 81.2 to 81.6.  Consumer assessments of the present situation improved by several points, while future expectations declined.  Inflation expectations also softened a bit over the year-ahead view (still at +3.2%), while the longer-term expectations were just under 3%, on par with the long-term range.

(-) The Conference Board’s consumer confidence survey for February came in at 78.1, which was lower than January’s 80.7 and the 80.0 forecast.  Consumer assessments of the present situation improved by several points, while future expectations interestingly declined somewhat.  The respondents reporting that jobs were ‘plentiful’ versus ‘hard to get’ improved by just over a point, on par with other data noting improvement on a still-low base.  Overall sentiment remained good relative to the improving trend seen over the post-recession era.

(-/0) Initial jobless claims for the Feb. 22 ending week rose a bit to 348k, from 334k the prior week and above the 335k estimate.  Continuing claims for the Feb. 15 week rose also, to 2,964k, from the previous weeks’ 2,956k (expectations called for 2,985k).

Question of the Week

What’s going on with Bitcoin?

Since they’re not a specific asset class in our investment process, we don’t often mention currencies specifically (especially synthetic currencies) but Bitcoin was the recipient of some unusual news this week.  The news was specifically focused on the Mt. Gox Bitcoin exchange in Tokyo, which appeared to be hacked and lost 750,000 ‘coins’ worth upwards of a half billion dollars and has declared bankruptcy as a result.  It’s unclear what happened to the coins, which may have either been stolen or somehow electronically voided, although more investigation remains.

For those that haven’t followed the story of Bitcoins closely, the idea came together in 2009 as part of an online-based digital currency designed to work as a secure method of electronic entity-to-entity payment without the involvement of banks, credit card companies or other third parties.  What’s the point?  Aside from avoiding the 2-3% charged by processors for typical electronic transactions, it’s presumably designed for global portability, safety (in that it isn’t carried physical cash) and secrecy.  Where accepted, it offers the obvious benefits one would have from paying with cash, including illicit dealings (a primary criticism) and tax avoidance.  For the pessimistic out there who believe the U.S. dollar, euro, pound, franc and yen are headed down the tubes, and aren’t quite ready to get on board with the renminbi quite yet, this offers another non-country specific option for a potential store of value—much like precious metals have provided historically.  Of course, like gold, it can be and has been speculated on and has a value all its own, which has fluctuated somewhat wildly versus developed market currencies, from a value of 1 Bitcoin = $1,100 USD in December to around $550 USD more recently.  On Friday, the coins fell by 10% in value, but this isn’t unprecedented—several days over the past year saw fluctuations in the +/- 20% range (!).  Just when folks thought the Turkish lira was volatile…

We don’t see this is an immediate threat to the global safe haven currencies, but the concept has experienced some popularity.  Undoubtedly, online security will need to be a primary consideration, as it is with all digital information.  In light of the theft last week, Vietnam joined the list of countries banning its use (China did so last December); as the technology of the currency is likely beyond the reach of some/many world regulators.  Some economists/currency strategists are beginning to track its value, so it could be worth watching in years to come.  On the other hand, a few of the less optimistic in the financial world assign it a fair value of zero, which obviously gives the story a very different ending.

Period ending 2/28/2014

1 Week (%)

YTD (%)
DJIA

1.42

-1.07
S&P 500

1.30

0.96
Russell 2000

1.62

1.81
MSCI-EAFE

0.65

1.31
MSCI-EM

0.75

-3.62
BarCap U.S. Aggregate

0.48

2.02

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.
12/31/2013

0.07

0.38

1.75

3.04

3.96
2/21/2014

0.05

0.33

1.56

2.73

3.69
2/28/2014

0.05

0.33

1.51

2.66

3.59
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Weekly Economic Update

Posted on February 24, 2014 by LSAConnect

On a holiday-shortened week, we ended up with a few noteworthy reports.

(-) The Empire manufacturing survey for February came in positive at +4.5, but weaker than the expected +8.5 (and lower than January’s +12.5).  In the details of the report, shipments and new orders fell sharply, and employment fell by just a point, so negative all the way around.  We get tired of talking about the cold winter weather (we will again later), but conditions in New York have been especially cold relative to average, so it would not be surprising to this having an impact.

(-) The Philadelphia Fed manufacturing index was much weaker than expected for February, coming in at a negative -6.3 versus January’s +9.4 and an expected +8.0 reading.  Most components of the survey came in weaker, including new orders, output and employment (with the exception of 6-mo. ahead cap-ex spending plans, which improved), with additional anecdotal commentary noting a ditto on the severe weather role.

(+) The preliminary Markit PMI survey increased 3 points to 56.7 for February, which compared favorably to an expected largely flat reading.  New orders and output rose by several points, while employment rose by just under a point.  Compared to other disappointing surveys as of late that may have experienced significant weather impact, this was a bit of good news.  This indicator has been more closely watched as of late since it does have some loose correlation to the ISM indicator.

(0) The producer price index (both headline and core) rose in January by a minor +0.2%, but a tick above expected.  The flattish numbers included a change in definitional treatment for some government purchases, exports and services; the only significant moving piece was a +3% gain in pharmaceutical prices.  On a year-over-year basis, PPI rose +1.7% and +1.3%, respectively, based on the old and new definitions used.

(0) The consumer price index, like PPI, rose at a tempered rate for January, gaining +0.1% on both a headline and core level, both of which were in keeping with forecast.  In the underlying figures, energy utility prices rose over +2% due to higher natural gas prices, offset by a -1% drop in gasoline.  In the core component, rent and owners’ equivalent rent both dropped, while services prices rose a few tenths, so many components neutralized each other on a net level.  For the trailing twelve months, headline and core inflation both also gained a similar +1.6%, so well-contained…in fact, almost too contained based on the Fed’s preferred 2% target.

(-) The NAHB housing market index for February came in a lot weaker than expected, falling 10 points from January’s 56 (same as this month’s expectation) down to 46.  Present single-family sales fell over ten points, while future single-family transactions and prospective buyer traffic were almost as bad.  All regions saw declines (West being the steepest), and the group generally blamed the weather for the bulk the drop, in addition to the availability/cost of workers and supplies (which could be directly related to the storms as well).

(-) Housing starts for January fell -16.0% to 880k (seasonally-adjusted annualized rate), which sharply underperformed the expected -4.9% drop; however, some upward December revisions altered things somewhat.  The single- and multi-family groups were evenly poor, so there was unusually little differentiation for the month.  Building permits also lost ground, falling -5.4% compared to an expected decline of -1.6%, with multi-family permits falling over -12% and single-family just over a percent.  Just to put this into perspective, we still need 1.5 million new homes a year or so to keep up with household formation demand on a demographic side—we’re still not there yet.

(-) Existing home sales for January came in lower than hoped, falling -5.1% compared to an expected -4.1% decline.  The single-family group, falling -6%, represented the entire amount, as condo/co-op sales were generally unchanged.  Additionally, all four U.S. regions were down, as the Northeast/South fell over -3% and West/Midwest lost just over -7%.  Of course, questions about potential weather impact remain here as well.

As with other economic data, these types of real estate measures are seasonally adjusted (taking into account the fact that much more building goes on during the summer than in winter), although the seasonal adjustment factors themselves don’t always go back for a large number of years, so extreme readings even during seasonally weak months can get these adjustments out of whack. Weather—cited by respondents as a major problem in the homebuilders’ index released during the week—mostly likely contributed to the decline in starts and overall sales activity (Midwest starts were apparently the worst in over five decades), which is intuitive.  If shoppers aren’t getting to the mall, they certainly aren’t taking time out for Sunday open houses.  The better test will be as the nation thaws and what the early spring numbers bring.

(+) The Conference Board’s index of leading economic indicators rose +0.3% in January, which was an improvement on the flat December.  Positive inputs originated from unemployment claims and financial indicators (like interest rate spreads), while building permits, manufacturing activity/hours and ISM new orders were a negative input.  The coincident and lagging indexes also rose, +0.1% and +0.3% respectively.  As we can see, despite the monthly noise, the longer-term trend is fully intact.

Economic Update 2-24

(+) Initial jobless claims for the Feb. 15 ending week fell just slightly, by 3k to 336k, just a tick higher than expectations calling for 335k.  Continuing claims for the Feb. 8 week rose by 37k to 2,981k, which was a bit higher than the 2,970k expected.

The FOMC minutes from the January meeting were as expected for the most part, other than comments from committee participants discussing potential changes to forward guidance language as the unemployment rate nears the pre-set 6.5% threshold.  They all seem to agree that an updated, looser measure is likely appropriate to continue the easing message; however, no one seemed to agree on how to do it.  Some commentators took this as a ‘hawkish’ indicator, in that rate increases could be closer to reality than initially thought, but a closer look at the wording doesn’t necessarily hint at this (however, a speech given later in the week by Dallas Fed president Richard Fisher may have given that impression).  Tapering was mentioned, mostly in the tone that committee members believe it should continue as planned barring any significant changes to the underlying data or outlook—so a continuation of the asset purchase wind-down remains the default choice.

The argument to raise the federal minimum wage over several steps from $7.25 to $10.10 hit somewhat of a speed bump as the Congressional Budget Office claimed doing so might offer mixed results.  On one hand, it claimed a potential lift of 900k families out of poverty and raising the standard of living for 16.5 million current low-wage workers (15% of the total workforce); on the other hand, it could eliminate 500k jobs from the economy.  The less dramatic ‘$9.00’ minimum wage option naturally resulted in a lessened impact in both the positives and negatives.

This is a politically-charged area of debate, and a testy economic one as well.  Classic economics tells us that setting minimum wage levels (or any type of ‘artificial’ price on a good or service, for that matter) isn’t efficient.  In the Laissez-Faire school of thought, if market forces are left to their own devices, workers are paid according to their individual economic value as well as prevailing supply and demand forces.  So, if there happens to be a glut of low-skill workers, employers keep the upper hand and can pay the lowest possible wage workers will accept (and have often done so historically).  However, this situation can create some other problems, such as if the market wage falls below the cost of living, so if this mismatch gets too extreme, it can lend itself into a catalyst for social unrest.  In the last century, this led to the creation of trade unions and legislating minimum per hour pay standards in several nations in the late 19th and early 20th centuries (New Zealand and Australia were first, followed by several U.S. states, such as Massachusetts, before it was done federally in a wave of Great Depression-era legislation in 1938).

While some economists have suggested that higher minimum wage levels increase unemployment for younger and lower-skill workers—essentially pricing them out of the workforce—the view is far from unanimous.  Other economists and political operators feel the social benefits of a ‘living wage’ outweigh the costs.  And, like many conditions in economics, the results aren’t measurable with precision due to the confluence of other factors involved.

Business behavior is somewhat predictable, though, in that owners seek to consistently maximize profits and keep expenses as low as possible.  For many (or even most) firms, payroll represents the largest operating expense, so an increase in required hourly pay either requires a shrinkage of profit margins (owners no doubt bristle at this prospect) or other adjustments.  To keep the payroll cost math constant, changes could include simply using fewer workers at a higher per-hour rate as opposed to more of the lower-paid variety.  If this happens often enough, the impact could certainly get to the 500k estimated jobs lost.  It wouldn’t necessarily be this extreme, or it could be worse, but these impacts would start at the micro-level.

Period ending 2/21/2014

1 Week (%)

YTD (%)
DJIA

-0.27

-2.46
S&P 500

-0.08

-0.34
Russell 2000

1.35

0.19
MSCI-EAFE

1.57

0.65
MSCI-EM

0.20

-4.33
BarCap U.S. Aggregate

0.08

1.53

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.
12/31/2013

0.07

0.38

1.75

3.04

3.96
2/14/2014

0.02

0.32

1.53

2.75

3.69
2/21/2014

0.05

0.33

1.56

2.73

3.69
Posted in Economic News | Tagged , , , , , , | Leave a comment

Weekly Economic Update

Posted on February 18, 2014 by LSAConnect

Economic Update:

 

(-) Retail sales for January came in a bit underwhelming, down -0.4% on the month, versus an expected flat reading.  Additionally, December sales were revised down from +0.7% to +0.3%, which cast a negative tone on the report.  The ‘core’ part of the January series (which is used in government GDP assumptions, so arguably more important) was down a similar -0.3%, which also underperformed the forecast—calling for +0.2%.  This report was also blamed on bad weather, since nothing like snow/ice does as good of a job in keeping people from getting out to buy things.  This was seen in the details of the data, which showed weakness in auto sales (-2.1%), department stores and sporting goods (each down about -1.5%) as well as restaurants/bars (declined about half a percent).  At the same time, though, online retail showed some weakness, and was also down a half-percent, albeit better than the brick-and-mortar variety.  The sole positive numbers came from building materials and gas stations, which gained over a percent.  While the report and prior month revision were disappointing, it is difficult to say how much of the negativity is weather-related.  Stock market participants watch retail sales quite closely, so February’s report (assuming weather isn’t a factor again, which it might be) will perhaps carry additional weight.  Month-to-month retail results can be volatile; it’s the multi-month trend that is most important.

Click for graph of Retail and Food Services Sales

(0) Wholesale inventories for December rose +0.3%, which fell short of the +0.5% forecast.  Durable goods inventories rose +1.3%, which was offset by non-durables, which fell -1.3%.  Inventory growth is relevant as it relates to GDP contribution.  Business inventories for December rose +0.5%, which was slightly higher than the +0.4% expected.  This broader measure includes manufacturing, wholesale and retail inventories, the latter of which increased the most over the month (due to auto inventories rising +1.3%).

 

(-) Industrial production fell more than expected for January, down -0.3%, compared to expectations of a +0.2% gain.  The manufacturing production component of this fell -0.8%, which was also a disappointment relative to an expected slight +0.1% gain.  The Fed noted that ‘severe weather’ took a toll on national production, so another winter issue perhaps, as has been the case throughout the reporting season.  Auto production fell -5%, which had a strong effect on the overall report, but other areas on net were also poor with the exception of utilities, which gained +4%, as they often do when cold weather hits.  Capacity utilization was far lower than the anticipated 79.3%, coming in at 78.5%.

 

(0) Import prices for January rose +0.1%, compared to an expected -0.1% decline.  Since petroleum imports fell a percentage point and auto prices fell a marginal amount, the difference originated from higher prices in consumer and capital goods.  On a rolling 12-month basis, prices have fallen -1.5%, which again shows a lack of imported inflation.  Imported goods prices from the Middle East (mostly oil) fell -6%, which is exactly what the pro-fracking political contingent likes to see.

 

(0/+) The Univ. of Michigan consumer sentiment survey for February came in at 81.2, which was unchanged from January but one point higher than expected.  Consumer assessments of current conditions deteriorated a bit, while expectations for the future improved by a few points.  Inflation expectations for the coming year rose a few tenths to 3.3% interestingly, while the longer term 5-10 year guesses remained just below the long-term average at 2.9%.

 

(+) The NFIB small business optimism survey didn’t change much from December’s 93.9 to 94.1 for January, but still remained better than consensus that called for an unchanged reading.  Expectations for higher real sales and plans to boost employment moved upward several points; however, earnings trends lost ground.  In terms of inventories, conditions looked relatively normal, and relatively not that different from neutral, so no excesses apparent.  The measure overall remains strong for this cycle, but weaker compared to prior cycles.

 

(0) The JOLTs job openings report for December came in at 3,990k, which surprised on the upside, relative to expectations calling for 3,980k, but was still lower than the 4,033k revised November number.  The details behind the headline were also a bit weaker, as the hiring rate fell a tenth to 3.2% and the layoff/discharge rate rose a tenth to 1.2%.  The quit rate fell a tenth as well, to 1.7%, the latter measure being one closely watched as a proxy for job market confidence.

 

(-) Initial jobless claims for the Feb. 8 ending week rose by 8k over the prior week to 339k, which was slightly above the expected 330k.  Continuing claims for the Feb. 1 week fell by 18k or so to 2,953k, which was lower than the 2,964k expected.  These continue to be somewhat lackluster, albeit likely affected by year-end activity and perhaps weather carryover.

 

Lastly, Janet Yellen gave her inaugural monetary policy testimony to Congress last week.  Everything generally went as expected.  Unsurprisingly, some analysts/economists look fairly deeply into the words spoken at these meetings in an effort to gauge some additional meaning.  One view we encountered used text mining to generate ‘word clouds’ (which takes the most common words used and highlights/bolds/enlarges them based on frequency of use, or vice versa, onto a graphical grid—we’re sure you’ve seen this done before on the national news or after political speeches).  Bernanke’s communications had most often referenced ‘financial,’ ‘purchases’ (i.e. QE) and ‘inflation’ (the latter being his academic focus), while Yellen’s comments last week highlighted ‘economy,’ ‘banks’ and ‘jobs’ (the latter being her academic focus).  In short, markets were soothed by the consistent message carried over from the prior leadership, but the underlying niche focus of each chairperson seems to ultimately seep out in their language.  This may mean absolutely nothing in terms of policy, or it could indicate a subtle push, as much of her commentary was centered on continued labor market slack.

 

 

Period ending 2/14/2014

1 Week (%)

YTD (%)
DJIA

2.45

-2.19
S&P 500

2.39

-0.26
Russell 2000

2.96

-1.14
MSCI-EAFE

2.48

-0.90
MSCI-EM

2.14

-4.53
BarCap U.S. Aggregate

-0.16

1.45

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.
12/31/2013

0.07

0.38

1.75

3.04

3.96
2/7/2014

0.08

0.30

1.47

2.71

3.67
2/14/2014

0.02

0.32

1.53

2.75

3.69
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Weekly Economic Update

Posted on February 11, 2014 by LSAConnect

Economic Update

The week’s economic data was generally disappointing, as reports covering the January time period were likely held back by the extreme winter weather over much of the nation.  The magnitude of weather impacts can be hard to measure precisely, but as they’re also noted specifically in anecdotal comments, there was an effect to at least a certain degree.

(-) The ISM manufacturing index fell more than expected, from December’s 56.5 reading to 51.3 for January (compared to a forecasted 56.0).  In fact, this was the sharpest decline since May 2011.  In the details, new orders, production and employment were all down, as were inventories; and the prices paid component (likely natural gas-related) rose on the month, which was an additional headwind for manufacturers.  However, it should also be noted that weather was indicated as an anecdotal reason for some of the poor numbers.  So, we had growth, but it was far below the acceleration expected, and markets reacted sharply to the negative by selling first and asking questions later.

(0) The January non-manufacturing ISM report, at 54.0, was less of a disappointment than the manufacturing version, as it both improved on the December number of 53.0 and came in largely in line with expectations of 53.7.  Under the hood, business activity, employment and new orders all improved, as did inventories.  It appears poor weather played less of an impact on non-manufacturing activity than on manufacturing activity during the past few weeks, which, due to the nature of the various businesses being measured, makes more intuitive sense (computers don’t stop working just because of bad weather, although strength was also seen in retailing and professional services, which could have some tempered impacts from bad weather).  Anecdotal references to activity also appeared more optimistic on the service side. Continue reading →

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Weekly Economic Update

Posted on February 3, 2014 by LSAConnect

The week was highlighted by a fair number of important industrial reports, as well as the closely-watched Fed meeting.  Unfortunately, there wasn’t enough decent news to offset emerging market-led concerns.

(+/0) As we recapped separately mid-week, the FOMC continued the taper, with an additional $10 bil. reduction in quantitative easing bond purchases.  Language about conditions and business/consumer spending was generally more optimistic, which goes along with recent actions.  Now, we’re down to $65 bil./mo. with more on the way, dependent on data.  If this same rate is sustained, the committee is on track to finish all purchases by October.  However, the ‘forward guidance’ for lo Continue reading →

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FOMC Update

Posted on January 29, 2014 by LSAConnect

After the much-anticipated taper in December, what could the Fed possibly do now to follow-up?  Turns out, more taper.  This is despite economic data in recent weeks looking a bit less robust than in the weeks prior (however, there may be natural seasonal volatility associated with this, not to mention extreme weather).  The magnitude of the updated tapering pace is an additional $10 billion in bonds per month, split equally between Treasuries and mortgage-backed securities, which brings the monthly purchases down to $65 bill./mo., from the $85 bill./mo. initial level.

Other Fed wording referenced economic activity having ‘picked up in recent quarters (compared to the ‘moderate pace’ used in December), as well as faster business fixed investment and household spending.  Commentary has also suggested ‘mixed’ indicators but improved employment conditions, albeit still a trouble spot.  The anticipated moderate economic improvement and interest rate modelling are generally unchanged from trend (with expected Fed Fund rate hikes in 2015, although some economists doubt it will happen this quickly).  So, policy remains data-dependent, but a bit more reflective of underlying improvement than meetings in 2013.

We mention this frequently, but there are a few key metrics to watch if one is interested in taking guesses at Fed policy (not always a wise game to bet on):  unemployment, inflation and economic growth.  The first two are the direct mandates the Fed is beholden to, while the last naturally affects impacts their direction.  Continue reading →

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Weekly Economic Update

Posted on January 27, 2014 by LSAConnect

After a fairly busy week, the MLK holiday led off a quieter one in terms of economic data releases.

(-) The Markit manufacturing PMI fell from 55.0 in December to 53.7 in January (versus expectations for an unchanged reading).  Within the index, new orders, output and employment all fell by up to a few points—with output disappointing the most.  While not a radical shift, it does conflict with other stronger regional Fed surveys this month.  At the same time, it is important to remember than any number over 50 signifies growth; in the case of this reading, a deceleration of growth for the month.

(-) The FHFA home price index, which covers properties financed with conforming mortgages, rose +0.1% for November, which underwhelmed expectations of a +0.4% gain.  In fact, this was the worst month since the summer of 2012 from a pe Continue reading →

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Weekly Economic Update

Posted on January 24, 2014 by LSAConnect

It was a very busy week in regard to economic releases, so we had to be a bit brief for a few of the less critical pieces.

(+) Retail sales for December came in stronger than anticipated on a relative basis, gaining +0.2% compared to consensus expectations of +0.1%.  Removing the choppier items of autos, building materials and gasoline, the ‘core’ retail sales number rose +0.7%, which more than doubled the forecast +0.3%.  A near -2% decline in autos was the primary culprit in the difference between headline and core, but the overall number was marked by near +2% gains in grocery stores, apparel and ‘non-store’ (aka online) retailers.  Sounds like Christmas to us, despite the seasonal adjustment already made for the holiday.  Unfortunately, November core sales were revised down a few tenths to offset some of the positivity of December.

(+) The NY Fed Empire manufacturing index came in stronger than expected, rising from December’s +2.2 to +12.5 for January, its highest level in a year (the expected figure was +4.0).  The base details were also stronger for the month, which included shipments, new orders, inventories and employment all up in the double-digit Continue reading →

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Weekly Economic Update

Posted on January 13, 2014 by LSAConnect

Economic Update

 

(0/-) The ISM Non-manufacturing index came a bit weaker than expected, falling from November’s 53.9 to 53.0 for December (expectations called for 54.7).  On the positive side, employment improved by several points, while business activity was generally flat, and new orders and inventories fell by over 6 points each.  This isn’t entirely surprising, as services consumption has significantly lagged goods consumption during this entire economic recovery.  However, it is improving, as the diffusion index being over 50 indicates positive growth—just not as good as that seen in the manufacturing survey the previous week.

 

(+) Factory orders for November rose +1.8%, besting forecasts by a tenth of a percent.  The underlying data was also generally in line with expectations, with core capital goods orders and shipments revised downward a bit, but strong regardless.  Inventory buildup wasn’t as dramatic as it could have been.

 

(+) While not often an exciting component, the November trade deficit shrunk dramatically to -$34.3 billion versus an expected -$40.0 bil.—its narrowest level since 2009.  The difference was largely due to changes in the petroleum balance, which fell by -$1.4 bil. on the month, as well as record U.S. exports to China.  Net-net, total exports increased by +0.9% while imports fell -1.4%.  While not a dramatic news item most months, this trade balance measure does play a key role in GDP and may have boosted growth by up to several tenths of a percent for the quarter.

 

(0) Wholesale inventories for November rose +0.5%, surpassing estimates by a tenth of a percent; however, October numbers were revised downward a bit.  Outside of the petroleum figures, computer inventories rose +3% and machinery gained just under +2%.

 

The bulk of the week’s news was jobs-related…

 

(+) Initial jobless claims for the Jan. 4 ending week fell by 4% to 330k, a positive surprise versus the 335k estimate.  Nothing strange was noted—per the Department of Labor who comments on relevant anecdotal happenings—but the holiday/year-end period does tend to be more volatile than average, and this can last through January.  The more relevant four-week moving average fell by 10k, which is a positive as well.  Continuing claims for the Dec. 28 week climbed a bit to 2,865k, above the 2,850k expected.  Of special note, the continuing claims portion doesn’t include any folks covered by the extended unemployment benefits that expired at year-end.  In looking at the state-by-state detail provided for the last week of 2013, northern states, such as Michigan and Pennsylvania, experienced greater claims due to layoffs in manufacturing and transportation, while improvements in claims came from California and Texas, where fewer layoffs in service positions helped.

 

(+) The ADP employment report for December, released on its traditional Wednesday before the big government report on Friday, was stronger than expected, with a gain of +238k jobs compared to +200k expected by consensus.  Additionally, the November report was revised higher—from +215k to +229k.  Underlying the headline figure, construction employment was a strong point—gaining +48k jobs (highest since early 2006)—while manufacturing and financial activities were up +19k and +10k, respectively.  Small business job gains led, with +108k of the total, relative to large- and medium-sized firms.  As we’ve mentioned before, the correlation between the ADP and government reports isn’t perfect, due to some definitional and recordkeeping-based differences between the two, but a stronger showing is certainly preferable to the opposite alternative.

 

(-) The closely-monitored government December employment situation report was a bit of a bust.  Only +74k jobs were added in the payroll survey report (the larger survey, which samples 400k business establishments), which dramatically lagged the expected +197k result.  The one plus is that November payrolls were even better than first report, as the final number was revised up by +38k, bringing the final to +241k.  The December report showed the fewest number of jobs added in three years, which almost certainly disappointed policymakers.  However, it’s quite likely that extremely cold weather nationwide played a role—273k persons were away from work due to bad weather (far above average and the largest December figure since 1977, believe it or not).  Weather was also responsible for a -16k decline in construction jobs (reversing November’s gain), but poor growth results were evident across a variety of areas.  State and local government jobs also declined -11k, in a reversal of the prior trend.  On the bright side, leisure/hospitality jobs grew +9k—albeit at a weaker rate than the prior month.

 

Conversely, the unemployment rate dropped from last month’s (and expected repeat of) 7.0% down to 6.7%.  The participation rate played a large role for December, as that dropped two-tenths of a percent from 63.0% to 62.8%.  Much has been made of the participation rate issue.  Analysis from the Fed and others outline a scenario where a bulk of longer-term labor force erosion since participation last peaked in 2000 has been due to demographic factors (namely baby boomer retirements, which may account for up to half of the gap).  At the same time, potential workers of ‘prime working age’ (25-54) also seem to be lagging in their workforce re-entry as well, coincident with an accelerated participation drop-off during the Great Recession.  This is an ongoing area of mystery for economists, as no one seems to agree on the causes or solutions—as it’s likely a combination of factors.  Average hourly earnings gained +0.1% for December, which was only half of the gain forecasted.  The average workweek fell by 0.1 of an hour to 34.4, which could also be weather-related.  In short, the extreme temperatures and weather put a dramatic damper on employment activity.  The true test will be if an anticipated bounceback happens for January—in keeping with the decent job growth trend prior to December.

(0) Lastly, the FOMC minutes from the December meeting didn’t offer any surprises.  For the most part, minutes don’t always offer great insights above and beyond the actual decision, but can provide additional some color as to committee sentiment.  The discussion showed the taper was supported by ‘most’ members, while ‘many’ indicated that further reductions should happen in measured steps.  Similarly, a ‘few’ members supported the lowering of the employment target from 6.5% down to 6.0%, so this could be interpreted as more of a controversial discussion point.  There still appears to be some disagreement (inside and outside the FOMC) about both content/language and future usefulness of the Fed’s ‘forward guidance’ language concept.  As discussed above, the labor force participation rate also appears to be a heavy discussion item—as to whether or not the weakness is cyclical or structural in nature.  The committee appears to feel the decline is cyclical, implying continued monetary accommodation should be helpful in solving the problem.  Rather, if it is structural, the monetary policy may end up being less effective.

 

 

Market Notes

 

 

Period ending 1/10/2014

1 Week (%)

YTD (%)
DJIA

-0.15

-0.77
S&P 500

0.63

-0.27
Russell 2000

0.74

0.09
MSCI-EAFE

0.63

-0.26
MSCI-EM

-0.95

-3.25
BarCap U.S. Aggregate

0.67

0.72

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.
12/31/2013

0.07

0.38

1.75

3.04

3.96
1/3/2014

0.07

0.41

1.73

3.01

3.93
1/10/2014

0.05

0.39

1.64

2.88

3.80
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Weekly Economic Update

Posted on January 6, 2014 by LSAConnect

(+) The ISM Manufacturing survey came in stronger than expected for December, at 57.0 versus a forecasted 56.8, but was a bit lower than November’s 57.3 result.  Underlying data was similarly strong, little changed from the prior month, with higher readings in new orders (actually, the best since spring 2010) and employment and a bit of contraction seen in production and inventories.  Despite the lower reading by a few tenths compared to the prior month, which implies lower ‘acceleration’ of growth (that’s the sneaky background behind diffusion index readings—a ‘50’ implies no change over the preceding month, while a number over 50 implies growth to some degree), conditions continue to point to strengthening.

(0) The Chicago PMI fell from a 63.0 reading in November to 59.1 for December—worse than the anticipated down to 60.8.  Underlying the core number, though, declines were a bit more widespread, with over 5-point drops in new orders, production and employment.  While a negative from a nominal standpoint, anything near 60 signifi Continue reading →

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Weekly Economic Update

Posted on December 30, 2013 by LSAConnect

During the holiday-shortened week, we received a small dose of economic data.  For the most part, the news was positive: consumer confidence rebounded while shopping for the holiday season, a stronger than expected number of durable goods orders in November, seasonally adjusted jobless claims continuing to edge downward, etc.

(-/0) Personal Income in November grew 0.2% from October, below a consensus expected increase of 0.5%.  Consumer spending measured by personal consumption expenditures (PCE) outpaced personal income growth.  The PCE was up 0.5%, in line with the market expectation.  Shoppers boosted their spending on durable goods at a monthly rate of 2.2% heading to the holiday seaso Continue reading →

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