LSA Connect

(-) Wholesale inventories came in weaker than expected for May, falling -0.5% versus an anticipated gain of +0.3%.  Auto inventories were flat (in contrast to making positive contributions in recent months), while machinery and nondurable goods fell nearly a percent each.  The inventory-to-sales ratio declined to its lowest level in the last year, which is not necessarily a bad thing—and represents either sales rising (which they have been) and inventory build-up remaining tempered and not overshooting demand.

(0) Producer price inflation (PPI) for June rose +0.8%, compared to a forecast of +0.5% (taking the year-over-year headline number to +2.5%).  The core component of the index sans energy and food rose +0.16%, which just surpassed the expected +0.1% (+1.7% year-over year).  The headline number was dictated by a +7% rise in seasonally-adjusted retail gasoline prices, while auto prices rising +1% underpinned core inflation results.  While a bit higher than in previous months as of late, these price measures remain contained.

(0) Import prices fell -0.2% for June, relative to a forecast of no change, making this the fourth straight month of declines.  The key areas of consumer and capital goods both declined slightly in keeping with the broader number; the primary factor appeared to be a substantial drop in prices from Japanese imports due to a weaker yen.

(-) The University of Michigan consumer sentiment survey fell from the final June number of 84.1 to 83.9 in July (compared to consensus expectations of 84.7), but remained near post-recession highs.  Consumer assessments of current conditions improved quite a bit; however, future expectations deteriorated.  Underlying these thoughts, three-quarters of consumers now believe interest rates will rise over the next year (previously, only half thought so), which may play a factor in consumer home buying before rates are expected to rise—according to anecdotal comments from the survey, as well as what makes logical sense from an economic standpoint.  Inflation expectations for the coming year ticked up to 3.3%, which is just above the long-term 3% baseline, but expectations for the longer-term beyond one year stayed around that median.  We look at this because ‘inflation expectations’ can be an important, yet sporadic, predictor of consumer behavior. Continue reading →

Despite it being a fairly quiet Independence Day week, a few significant releases made the news and affected markets later in the week.

(+) The ISM manufacturing index came in a bit better than expected, rising from 49.0 in May to 50.9 for June (vs. a forecasted 50.5 number).  Forward-looking new orders and production both improved, but employment fell and inventories rose a bit on the negative side, as did raw materials prices.  Manufacturing employment fell for the first time since Fall 2009 (more on that later).  The best industries from a growth standpoint were furniture/related products, apparel, electrical equipment and appliances (several not a surprise, considering the housing recovery); while the worst were computer/electronics, chemicals and transports.  From anecdotal survey comments in a variety of industries, business seems to be growing…albeit slowly.

(-) Conversely, the ISM non-manufacturing index fell, somewhat unexpectedly, from 53.7 in May to 52.2 in June—versus a forecasted 54.0 result.  The forward-looking new orders dropped, as did overall business activity and new export orders.  However, the employment component posted a solid gain.  Interestingly, the non-manufacturing index was the mirror image of the manufacturing version.  Anecdotal comments from respondents in these industries reflected a more challenging and nuanced environment, with cost savings measures playing a role in profitability, greater volatility in customer behavior, and uncertainty surrounding the healthcare reform issue. Continue reading →

(-) The third and somewhat final estimate of first quarter GDP was revised downward—and quite dramatically—from the second estimate of 2.4% down to 1.8%.  The revision was based entirely on a reduction in consumer services consumption growth, which ended up accounting for essentially the full 0.6% in question (a component that fell from 3.4% growth in last GDP release to only 2.6% in this one).

Although relatively dramatic, measures of growth for previous quarters don’t significantly change how economists view upcoming periods.  Second quarter GDP looks to be largely similar to that of the first quarter—likely around or just below the 1.5-2.0% range.  The second half of the year holds a bit more promise, as estimates are a bit higher (more like 2.5-3.0%), but the overall year-over-year figure looks not unlike the ‘normal’ conditions for the past 15 years, depicted in the chart below.  And, in order for Fed estimates to play out for their ‘taper’ plans, growth might need to surpass 3% for the next several quarters.  For 2014, estimates begin to rise above 3% more consistently.

(+) Durable goods orders for May came in slightly better than expected, up +3.6% relative to a consensus +3.0% gain.  Removing transports from the equation brought the gain in orders to +0.7%, compared to expectations of a flat report.  Consequently, the difference implies a big move in transports—in this case a +50% gain in non-defense aircraft, and more specifically, Boeing orders (a reminder of how fickle and nichy these series can be—when one company’s products are involved).  Core shipments rose +1.7% in May, which was partially due to a revision lower for April. Continue reading →

This week’s news was highlighted by the FOMC meeting, which resulted in a reiteration of the current policy of accommodative mortgage and treasury bond buying.  However, further comments regarding the timing of the inevitable ‘tapering’ off of QE down the line were taken quite negatively by several asset markets—including global stocks, bonds, real estate and commodities.

One would have thought the Fed was raising rates by a few percent based on the reaction, but all Chairman Bernanke clarified in the post-statement press conference was that the Fed expected to reduce its stimulus later this year, and perhaps end bond purchases entirely by mid-2014, assuming unemployment falls in accordance with current projections (towards their target of 6.5%—which itself is subject to future adjustment).  As we mentioned in the special Fed note last week, the market reaction was somewhat ironic in that the eventual exit was taken as a short-term negative (markets falling several percent with Treasury yields rising), while it actually signifies a greater degree of confidence in the recovery and a lessened need for government stimulus.

With a dearth of other world crises to worry about last week, perhaps Fed policy is being even more closely scrutinized than normal.  Nothing concrete was said in regard to current bond-buying or interest rate strategy specifically; rather, it was a bit of additional clarification on timing of potential activity if current trends continue—trends that many well-regarded economists have been forecasting and commenting on for some time (in fact, many feel the Fed is being overly optimistic in their timelines).  We wish we could say (not really) that some new and surprising development was shared that underpinned this negative reaction.  But it wasn’t.  This potential exit plan has been analyzed and modeled over and over again for several years now by both those inside and outside the Fed, and will continue to be going forward—if not more so.  More below on how this relates to portfolios. Continue reading →

The Federal Open Market Committee completed their meeting this morning, and the conclusion was much the same as we’ve come to expect:  continued stimulus in the form of $85 billion in bond purchases a month with the same targets (6.5% unemployment assuming no higher than 2.0% inflation).  However, their outlook seemed slightly more optimistic on the economy, and also contained an acknowledgement of diminished downside risks.

Although it doesn’t feel like it, employment has been improving this year (the unemployment rate ticked up last month with bet Continue reading →

(+) 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. Continue reading →

On June 3^rd, 2013 Lord Abbett posted a great article that was referencing “Why Bondholders May Not Need Worry.” https://www.lordabbett.com/advisor/commentary/marketview/great-rotation-why-bondholders-may-not-need-to-worry/

This was a great article that shows that although May was a difficult month for bonds the average investor still remains skeptical of equity risk.  We have been talking for years now about this economic house built on cards and at the end of the day the question remains to be seen if equities can continue this bull run.

(-) The ISM Manufacturing report came in a bit weaker than expected, falling from April’s 50.7 to 49.0 for May, compared to the 51.0 level anticipated and pushing the measure to its lowest level in three years.  Weaker underlying components included forward-looking new orders and production, while inventories rose by a few percentages points.  The underlying employment segment, however, was largely unchanged.

(+) The May ISM Non-Manufacturing index, on the other hand, came in higher than the previous month and a bit better than expectations, at 53.7 versus 53.5.  Details were mixed, with new orders and business activity improving, while employment continued to fall (a significant drop since January).  This index, like its manufacturing counterpart, continues to plod along near its lowest level in three years, but with the diffusion index being over 50, suggests slow/moderate growth looking forward.

(-) Factory orders gained +1.0% for April, which disappointed somewhat relative to the anticipated +1.5%; however, March orders were revised down by an additional 0.7%, which tempers the overall April change.  Core capital goods shipments were revised up a bit for both months, and non-durable inventories fell a bit.  This looks to be more of a flat period for factory orders, while the lack of inventory is a bit of a negative influence. Continue reading →