Category Archives: Uncategorized

March Existing Home Sales

KEY DATA: Sales: +5.1%; 1-Familly: +5.5%; Condo: +1.8%; Prices (Year-over-Year): +5.7%

IN A NUTSHELL: “Home sales rebounded in March, but the lack of inventory is likely to keep gains down for some time to come.”

WHAT IT MEANS: Housing is dominating the data this week and the mixed results don’t point to a vibrant market. Yesterday, we saw that housing starts were soft, which came on top of a stagnant homebuilders’ confidence. Today’s existing home sales numbers were better than expected, but really not that great. Sales rose in March quite solidly, rebounding from a down February. Single-family activity was somewhat stronger than the condo market. The increases were across the nation, with every region reported a rise in closings. Still, we are below the sales pace posted in December and January and the rise from March 2015 was a modest 1.5%. Condo sales were actually down from last March, though it is not clear why. The big problem remains the supply of homes on the market. There are only about a 4.5 months supply at the current sales pace. That is way too low. With supply low, it is not surprising that price gains remain quite strong.

MARKETS AND FED POLICY IMPLICATIONS: The housing market is doing okay, and I mean just okay. There is some hope that sales may accelerate. Demand for high-priced units was soft in March. That may reflect the uncertainty created by the stock market volatility we saw in January and early February. Since these data reflect closings, it may be a few more months before upscale demand rebounds. With the equity markets coming back nicely, an upturn in the upper end of the market is likely. Until then, we can only forecast a better market and that is something many Fed members are unwilling to bet on. As for the markets, stronger than expected economic data are usually not viewed positively by traders, and this report was a little higher than projected. But it was mixed, so I don’t expect any major reaction to these numbers, especially give it is earnings season.

March Retail Sales and Producer Prices

KEY DATA: Sales: -0.3%; Excluding Vehicles: +0.2%/ Producer Price: -0.1%; Goods: +0.2%; Services: -0.2%

IN A NUTSHELL: “The consumer seems to have decided that visits to the mall are passé.”

WHAT IT MEANS: Consumers have been the broad shoulders of the economy, but carrying the load seems to tiring them out. Retail sales faded in March, which was not a major surprise given that vehicle demand was off fairly sharply. Indeed, excluding vehicles, which were due for a slump after having been strong for so long, demand for retail products rose. Unfortunately, the gain was not very strong. The details of the report were mixed. Clothing was down but building supplies were up. Restaurant demand fell, a real eye opener since this was a leading sector, but furniture and appliances inched upward. We didn’t do a lot of online shopping but we did visit general merchandise stores. Gasoline sales jumped, but there was also a rise in gasoline prices. Basically, we bought some goods here and there but not a lot of things in general.

On the inflation front, business costs remain under control as the Producer Price Index fell in March. This was a strange report as goods prices actually rose while services costs declined. That was a reversal of past reports. The decline in services costs was pretty widespread. It is unclear why there was a sudden downdraft in services prices, so we should not take this report as an indicator that we could see weak pricing in the largest component of the economy. On the goods side, food costs decline but energy prices were up. Excluding food and energy, wholesale prices rose modestly, a sign that any further acceleration in inflation should be limited.

 MARKETS AND FED POLICY IMPLICATIONS: The first quarter of this year looks like it was a total downer. We knew business investment was going to be soft because of the continuing problems in the oil complex and that exports were likely to be modest due to the strong dollar. But there was some hope that the consumer would make up for those other sectors. Those prayers seem to have been dashed. GDP growth could come in around 1% or even less, depending on inventories. That would make it two consecutive quarters below 2%, which in itself is nothing great. So, why has the consumer left the field of battle? It isn’t because households don’t have the money to spend, they do. It’s not as if confidence is faltering, it is not. So, is this the pause that refreshes or the pause that depresses? My view is that the long, slow recovery has caused people to fundamentally change their buying habits. Is the trip to the mall really something that is high on the priority list? I am not so sure. Parents don’t have to drop their kids off at the mall to get rid of them for a few hours anymore. They just have to pay for data. And the recession taught us that the things we once thought we needed, we really didn’t need.   Consumers will continue to consume, but the rate of consumption may have shifted downward, at least for a while.

March Non-Manufacturing Activity and February Trade Deficit and Job Openings

KEY DATA: ISM (NonMan.): +1.1 points; Orders: +1.2 points /Trade Deficit: $1.2 billion wider/ Openings: -159,000; Hirings: +297,000

IN A NUTSHELL: “Politicians and market experts keep saying the economy is trouble, but the data keep telling us that is just not the case.”

WHAT IT MEANS: All portions of the economy look like they are coming back. Last Friday, the Institute for Supply Management reported that manufacturing grew solidly in March as orders surged. Today they reported that the non-manufacturing portion of the economy improved as well, also because of rising demand. Exports were solid, a story repeated in the trade data. In addition, hiring picked up, which we saw in the March employment report. Backlogs are building, though not rapidly. With orders and business activity up and order books filling, it is likely we should see solid job gains in the months to come.

As for the nation’s trade situation, there was good news and bad news in the February report. First, the deficit widened, which means more money is flowing out of the country to buy foreign products. But while imports were up, so were exports. Foreign purchases of our products are coming back. The manufacturing sector had been battered by low energy prices and the rising dollar, but at least those companies that sell their products overseas may be coming out of the dark tunnel. We sold more computer products, telecommunications equipment, engines, motor vehicles and consumer products. However, we bought lots of consumer products and capital goods. That points to improving household and business activity.

As for the labor market, there was mixed news in the February Job Openings and Labor Turnover Survey (JOLTS). This is a favorite of Chair Yellen and who knows how she will react to it as openings fell but hirings jumped. The new hires were the highest since November 2006, which is impressive. It just might be the firms have finally figured out how to fill all those open recs, which may explain the decline in openings. There was also a rebound in quits. There had been a sharp drop in January, which was strange. As it turns out, it looks like the decline was just a blip in the trend toward more people leaving their jobs to find other positions. That only happens in a solid labor market.

 MARKETS AND FED POLICY IMPLICATIONS: For the most part, today’s reports point to a domestic economy that is in good shape. First quarter growth looks like it may be a little less solid than hoped for, but the underlying data indicate all is still well. That means the battle for the hearts and minds of Fed members will continue. The Chair will continue doing all she can to rein in those who want to make moves sooner and more often than she does, while the opposition uses the latest data as ammunition to return fire. I don’t expect either side of the hike/don’t hike debate to back down until the inflation data demand that one side capitulate. With states passing increased minimum wage laws and companies raising their wages to match competitors’ moves, I just don’t understand how the compensation data have stayed so tame for so long. But I have argued that wages are set to jump for over a year now, so maybe I never will get it. Anyway, investors should see these reports as supporting the hawks at the Fed. But the markets haven’t delinked from oil, so who knows where they will go given the wishy-washy nature of the petroleum markets.

March Employment Trends and February Factory Orders

KEY DATA: Trends Index: -1.06 points; Orders: -1.7%; Durables: -3%

IN A NUTSHELL: “Job gains have been holding up but unless growth improves, the monthly payroll increases could slow as we move toward the summer.”

WHAT IT MEANS: With Fed Chair Yellen focusing more on wage pressures rather than the domestic economy, which she thinks is good, the labor market data are the ones to watch. The Conference Board’s Employment Trends Index eased in March after a smaller decline in February. The year-over-year increase has slowed markedly in the last six months and since this is a forward-looking indicator, it is pointing to slower job gains ahead. That should not come as a surprise, as the sluggish growth over the past six months didn’t put as much of a damper on hiring as would be expected. Ultimately, either growth has to accelerate or payroll increases are likely to decelerate.

One sector where jobs have been hemorrhaging is manufacturing and there still isn’t any really good news that would point to a recovery. Factory orders fell in February as durable goods demand was off even more than the preliminary estimate. Nondurable goods orders were also down, but more modestly. Most of the decline in factory orders came from slippage in two sectors, mining and aircraft. We can gloss over the aircraft cut backs, as they are hugely volatile and don’t create much near-term impacts. The oil-sector, though, continues to restrain overall economic growth.

 MARKETS AND FED POLICY IMPLICATIONS: While the Conference Board’s Employment Trends Index moderation is a warning sign that hiring could ease, it is not yet signaling a major downturn in job gains and clearly not a drop in total employment. But any easing in job creation would slow the decline in the unemployment rate, especially given the recent rise in the participation rate. That would provide Chair Yellen with more ammo as she defends her “slow as she goes” rate hike policy. But too much is being made of the monthly data on wages. They can be biased by changes in the distribution of jobs and not reflect what is actually happening. It’s simple math: If there lots of jobs being created in the relatively lower paying retail and hospitality industries but losses in the relatively higher paying manufacturing and energy sectors, the weighted average would go down – or the rise would be restrained. But that is just a distributional issue. Let’s see what other, better measures, such as the first quarter Employment Cost and the Productivity and Costs reports say when they are released at the end of the month and early May. Until then, Chair Yellen has a strong argument that wage pressures are modest and are indicating there still is slack in the labor markets, as she fights against those at the Fed who want to raise rates sooner and more rapidly than she does.

March Private Sector Jobs and Help Wanted Online

KEY DATA: ADP: 200,000/ Online Ads: -31,500

IN A NUTSHELL: “Businesses may be buying ads less but they are enjoying it more as hiring remains strong.”

WHAT IT MEANS: It’s Employment Friday week and that means the ADP estimate of private sector job gains comes out on Wednesday. Once again, the ADP report is pointing to a solid rise in nonfarm payrolls when the March numbers are released on Friday. This was as good a report as you can get as the increases were spread across all industries and firm sizes. Every sector, including manufacturing posted a decent rise in payrolls. While the industrial heartland is still feeling the pain of the strong dollar, the negative effects are dissipating and that bodes well for job gains and economic growth. Looking across firm size, there were increases in every segment. About the only soft spot was large corporate (1000 or more employees) hiring. That portion added workers, but not at as solid a pace as the small and mid-sized companies.

While hiring is strong, firms seem to be cutting back on advertising. The Conference Board’s Help Wanted Online measure fell in March. This trend has been going on, in fits and starts, since the peak last November. The weakness was not universal as ad activity rose in the West and South but fell in the Northeast and Midwest. Only 17 of the 51 metro areas posted gains.

MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen is still waiting for the labor market to tighten and the rest of the world to catch up with the U.S. Yet the job market looks pretty good. The ADP report points to another job gain of about 200,000 to 225,000 in March. That is my guess and I also expect the unemployment rate to edge down to 4.8%, the Fed’s rough full-employment number. Is the moderation in want ads indicating a future softening in job gains? Not necessarily. Despite the claims that firms cannot find qualified workers, they seem to be doing so and payroll gains have been robust. Firms may simply be doing a better job of calibrating hiring activity with advertising activity. They could also be realizing that some of the open recs are not going to be filled and it doesn’t make sense to keep advertising the positions. Of course, it could be that growth has slowed and there just isn’t as much of a need for workers. I guess we will see soon enough if that is the case. As for the markets, Chair Yellen’s dovish comments yesterday were just the tonic that equity investors needed. Nothing helps equities more than a Fed Chair who is worried about the economy and wants to go slowly when it comes to raising rates. I only wish that investors would actually want strong growth and better earnings rather than just low rates, but I have been saying that for so long that even I am bored of repeating that lament. Yellen basically told the hawks that they could bleat all they want, she has no intention of raising rates in April and she is unwilling to even venture a hint at when the next move might occur. She is watching wages and the number of part-timers who want full-time jobs. I expect wage gains to reaccelerate and part-timers to fall, but I also don’t expect that Friday’s report will really make much of a difference unless it is much strong than expected. A soft report would only reinforce the view that the Fed is on hold for a while.

February Consumer Spending, Income and Pending Home Sales

KEY DATA: Consumption: +0.1%; Disposable Income: +0.2%; Prices: -0.1%; Excluding Food and Energy: +0.1%/ Pending Sales: +3.5%

IN A NUTSHELL: “Despite having the money to spend, households seem to be dispensing it using an eye-dropper.”

WHAT IT MEANS: To spend or not to spend, that is the question and it doesn’t seem that consumers are coming down on the side of spending with any gusto. Consumption rose modestly in February and the huge gain initially estimated for January disappeared into a similarly modest rise. The problem area was nondurable goods, which includes gasoline. Adjusting for inflation, spending was up more moderately, though not spectacularly. Purchases of services were strong, which is good news since that segment comprises about two-thirds of consumption. Households are not hurting for cash, though the February income report was odd. There was a very decent increase in income, adjusted for taxes and inflation. However, wages and salaries declined. That happened despite robust job gains. An exceptionally strong increase in January was probably followed by a more normal February and the seasonal adjustments didn’t like that. Don’t be surprised if wages and salaries rebound solidly in March. As for inflation, prices were tame. Excluding food and energy the increase also seemed to be modest. The core index actually rose 0.1494%, which was reported as up just 0.1%. Had it risen by another 0.0006% (six ten-thousandth of a percent), the headline would have read up 0.2%, which would have been viewed as another solid gain. Understanding the data requires a lot more than looking at the headline number. For the year, overall prices rose a modest 1% but the “core” was up 1.7%, which isn’t that far from the Fed’s 2% target.

On the housing front, the National Association of Realtors Pending Home Sales index, which reflects signed contracts, rose strongly in February. It was down in January. The Midwest led the way with the South and West also posting increases. There was a modest decline in the Northeast. Still, the minimal increase over the year points to a sluggish housing market.

MARKETS AND FED POLICY IMPLICATIONS: Recent Fed member comments are driving home the message that the U.S. economy is in decent shape but the world economy is uncertain and inflation remains too low. Today’s reports will not change that view. The Fed is in a bind. The economy is solid enough that looking at it on its own, and the trend in inflation, conditions have been largely met to raise rates further. But negative world interest rates are driving capital into the U.S., keeping mid and long-term rates down and putting upward pressure on the dollar. Increasing rates could exacerbate those trends. So what would force the Fed’s hand? Rising Inflation. Chair Yellen believes the recent acceleration in core prices was driven by temporary factors. There are two more reports before the June FOMC meeting and if her expectations were wrong, then she might have to modify her stand. As for the markets, the pathway forward is even more confusing. Investors have to consider Fed speeches, job growth, wage and price gains, the dollar, oil, world growth, terrorism and whether Villanova can actually win it all. (Okay, maybe not the last one as they can win it all.) In other words, look for choppy markets going forward.


February Consumer Prices, Housing Starts and Industrial Production

KEY DATA: CPI: -0.2%; Excluding Food and Energy: +0.3%/ Starts: +5.2%; Permits: -3.1%/ IP: -0.5%; Manufacturing +0.2%

IN A NUTSHELL: “With the manufacturing and housing sectors improving and inflation on the rise, the Fed could easily signal that rate hikes are coming, possibly sooner than most think.”

WHAT IT MEANS: It was a good day for the U.S. economic data, at least if you like growth and a continued pick up in inflation. Consumer prices fell in February. So what else is new? Well, how about the broadening of price pressures outside the energy sector? Excluding energy, prices rose solidly. The core, which also excludes food, rose by the fastest pace in nearly four years. Looking at the details, there were few categories where prices actually declined. While it was good to see that cookie prices were down, that was offset by a rise in donut costs. Oh, well. There was one major outlier that may have artificially upped the price increase: Apparel prices surged 1.6%. That makes no sense at all since most of our clothes are imported and I don’t see that kind of increase in the import price data.

On the housing front, builders look like they are getting those shovels back into the ground. Housing starts jumped in February despite a massive, likely snow-induced, 50% drop in the Northeast. The Midwest, South and West were all up solidly. There were also increases in both the single-family and multi-family segments of the market. Looking forward, permit requests did fall. However, they had been running well ahead of starts. Even after the February decline, the three-month average for permits is still above the average for construction, so I don’t look at the drop as indicating a future slowdown in activity.

Industrial production fell sharply in February. Not to worry as utility output was down big-time. That’s weather. Meanwhile, manufacturing output increased decently, adding to a strong gain posted in January. The industrial heartland is coming back and is no longer the weakest link.

 MARKETS AND FED POLICY IMPLICATIONS: While yesterday’s data came down on the side of the Fed taking the cautious route at its meeting, today’s numbers, especially the inflation report, is a warning that the days of no price pressures are behind us. The FOMC cannot slough off the idea that inflation is not an issue, despite the headline declines in the reports. There is a broadening in the price pressures and while it is not high yet, it is no longer below the Fed’s target, when you remove energy. Because of the recent drop in petroleum prices, it may take until the fall before the year-over-year energy price decline is largely wiped out. But when that happens, the overall index will also exceed the Fed’s target and the Fed members have to start planning now for that eventuality. With the Fed’s statement and Janet Yellen’s press conference coming soon, investors are likely to remain cautious. But while the Fed is likely to keep rates steady, I think the members are willing to hint that rates could be going up. Investors may not be fully prepared for that.

February Retail Sales and Producer Prices

KEY DATA: Sales: -0.2%; Gasoline: -4.4%; “Control”: 0%/ PPI: -0.2%; Finished Consumer Goods less Food and Energy: +0.3%; Services: 0%

IN A NUTSHELL: “As the latest FOMC meeting starts, the members are faced with a consumer that is far from exuberant and prices that are well contained.”

WHAT IT MEANS: The Fed members are meeting to figure out what to do next, if anything, and today’s numbers are no help. Not surprisingly, retail sales fell in February. Lower gasoline prices and a modest decline in vehicle sales were major factors in the drop. But there were also declines in furniture, electronics and appliances, department stores and supermarkets. We even bought less online. The only strong areas were clothing, building supplies and restaurants. Eating out is once again in. So-called “control group” sales, which exclude autos, gasoline, building materials and food services, were flat. Since this measure best mirrors the GDP consumption number, it points to less than stellar household spending this quarter, especially since last month’s control group gains was revised downward sharply.

On the inflation front, wholesale prices declined, as usual. With another sharp drop in energy costs, a fall in overall producer costs was a given. Most other areas were also tame. There was no rise in services costs, which had been driving the index. However, prices of finished consumer goods excluding food and energy continue to increase faster than any other category, indicating pressure on household prices may be building. Looking down the road, the pipeline appears to be largely empty. Intermediate and unprocessed goods prices were also largely down over the month.

One other number was released today and it was a good one. The New York Fed’s Empire State manufacturing index rose sharply. What it now shows is that instead of declining dramatically, the New York manufacturing sector is starting to increase, though modestly. Orders are picking up and expectations are rising. Hiring, however, has remains stunted.

 MARKETS AND FED POLICY IMPLICATIONS: Well, if you don’t like the economic data, wait a month and they will be revised. That is what happened with the retail sales numbers, which is a warning to the Fed. What you see today may not be what you see not too far down the road. The FOMC made that mistake in September, when it saw all sorts of weakness around the world and stepped back from hiking. That was also the case in January, when the Committee was again worried about the world and commodity prices. One constant, whether the Fed members wanted to accept it or not, was that the U.S. economy was in good shape. It is, but is it in as good a shape as we thought when the data told us consumers were spending this quarter? The retail sales report will only make it more difficult for those on the Fed who want to resume the tightening process. That said, with incomes rising and job growth strong, the prospects are for households to spend on things other than vehicles, both new and used. All those new vehicle loans – and the resultant monthly payments – are sapping consumer buying capacity. Still, household spending is disappointing and that could temper the statement that the Committee issues as well as Chair Yellen’s comments at tomorrow’s press conference.

January Spending and Income, February Consumer Confidence and Revised Fourth Quarter GDP

KEY DATA: Spending: +0.5%; Income: +0.5%: Prices: +0.1%/ Confidence: -0.3%/ GDP: +1% (Up from 0.7%)

IN A NUTSHELL: “With consumers spending, incomes growing and confidence stable, it is hard to understand why we are seeing all those stories about a recession on the horizon.”

WHAT IT MEANS: “The recession is coming, the recession is coming” – Really? While I may look a little like Alfred E. Neuman (not really), I don’t go around saying: “What me worry?” I do worry when there are good reasons to worry. That is not right now. It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services. More importantly, households can keep up the pace, as income growth was robust. Wages and salaries are on the rise, which is what we would expect from the tight labor markets. Consumers may be spending, but the rise in incomes has been enough to keep the savings rate constant. On the inflation front, while the overall increase was not significant, a lot of that was from commodities. The cost of services, which is nearly two-thirds of consumption, continues to accelerate. The year-over-year increase in the Fed’s favorite inflation measure, the Personal Consumption Expenditure price index, was the highest in over a year. Excluding food and energy, the index was up the fastest in three years. We may still be below the Fed’s inflation target, but the target can now be seen by the eye, not just on radar.

Another reason to be optimistic is that consumer confidence is not crashing, despite the mayhem in the markets. The University of Michigan’s February reading of Consumer Sentiment did tick down, but the decline was not nearly as much as might be expected given the stock market declines. The concerns did show up in expectations, which fell sharply.

The government revised fourth quarter GDP growth up a bit. A small decline was expected, so the modestly faster growth pace was a nice surprise. The revisions were minor in most categories and don’t alter the perception that the economy eased at the end of last year.

MARKETS AND FED POLICY IMPLICATIONS: The long awaited rise in wages and salaries is starting to show up. Now, we shouldn’t expect the sharp January increase to be repeated as some of the gain came from first of the year raises. But with jobless claims low and job openings high, it is likely that the wage acceleration that has been occurring for the past three years should continue this year. With incomes rising and financial conditions improving, there is every reason to believe households will continue opening their wallets. This report provides more ammunition for those at the Fed who say that market volatility should be watched but should not be the determinate of policy. It’s the economy and inflation that matter. Growth is rebounding, inflation is picking up and stocks have recovered about half the loss posted this year. In other words, conditions are moving back toward supporting a rate hike.    

January Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Durables: +4.9%; Excluding Aircraft: 1.7%; Capital Spending: 3.9%/ Claims: +10,000

IN A NUTSHELL: “The broadly based rise in demand for big-ticket items is a sign that manufacturing sector is starting to stabilize.”

WHAT IT MEANS: The weakest link may still be the weakest link, but it may not be that weak anymore. The manufacturing sector, battered by the rising dollar and the collapse in oil prices, has faltered recently. However, given the surge in durable goods orders in January, the problems are starting to disappear. Yes, the wildly volatile aircraft sector accounted for about two-thirds of the gain, but demand for private and defense airplanes was not the only source of strength. Machinery, electrical equipment, computers, communications equipment, motor vehicles and metals were all up solidly. As for business capital spending, there was a strong rebound there as well. One month doesn’t constitute a trend, but maybe the oil complex cut backs are easing and demand in the rest of the economy will start showing through. Though orders were strong, so were shipments, which led to a modest rise in backlogs. Order books need to fill faster if production is to accelerate.

On the labor market front, jobless claims rose solidly last week, but that is hardly a concern. The previous week’s level was extremely low, so we just got back to very low levels of claims. The data are consistent with a solid rise in payrolls in February.

MARKETS AND FED POLICY IMPLICATIONS: So, what should we make of the economy? If the weak is no longer that weak, and the strong, which is the labor market, remains strong, then I think it is fair to say the economy is in good shape. But investors don’t seem to care that much about the economic data. If oil prices fall, so do stock prices. If oil prices rise, so do stock prices. So, maybe we should just forget the economy. Not. Ultimately, the umbilical cord binding stock and oil prices together will be cut and economic fundamentals will once again matter. Will the markets rebound at that point? It really depends upon which stocks you are looking at. Domestic firms should do just fine. However, international firms have to worry about the dollar and growth in the countries where they do business. The dollar has stabilized, at least when you look at the indices, so executives will have to come up with other excuses if their earnings don’t do as well as investors thought they should. Regardless, the Fed will not place huge importance on foreign earnings, and therefore the stock prices of international companies, unless the markets crash and burn. It is still the U.S. economy that is job one. Friday we get January incomes, spending and the all-important Personal Consumption Expenditure index. Other inflation measures have been moving up and if the PCE follows, that would be another reason to think the Fed members will start talking about future rate increases.