Your Weekly Update

Current themes:

Central Banks:

Janet Yellen didn't disappoint traders last week during her semi-annual testimony to Congress. She promised no rate hikes for at least the next two meetings and, even then, only upon evidence that the labor market is sufficiently tight and inflation is of enough concern to warrant the first step in getting rates to a point where they somewhat reflect present-day reality (i.e., the U.S. economy---contrary to what a zero interest rate policy typically portends---is doing pretty well these days).

The European Central Bank begins its bazooka of a QE program this month. And, my, how the pundits have come out of the woodwork predicting good things for the area's stocks going forward. As you know, I've been feeling pretty good about Eurozone equities myself of late.

Here's from my 11/24/2014 commentary:

While the Fed is done for now with QE (printing dollars and buying treasuries and mortgage backed securities), the Bank of Japan, the ECB and The Peoples Bank of China (just lowered its benchmark interest rate for the first time in two years) are doing their darnedest to devalue their respective currencies (bolster their exports).  Stocks across the globe popped (Europe’s especially) higher on Friday on news that China was cutting interest rates and that Draghi was willing to buy all manner of bonds to create a little inflation in Europe.

Among developed markets, the Eurozone currently has my attention the most. Back in January 2013, I was telling clients that, while I was making no market prediction, I was comfortable with the U.S. stock market from a valuation perspective. And, as you’ll recall, 2013 was a phenomenally good year for your portfolio. But, again, I was not making that prediction, I just happened to be comfortable with U.S. stocks at the time. (Here’s an article I dug up from back then where I touched on that sentiment). And while—with the U.S. economy at last showing possibly sustainable signs of life—I probably should be equally sanguine on our market today, I’m actually feeling a little more comfortable (from a forward rate of return standpoint [not necessarily from a relative risk standpoint]) with European equities at the moment (as strange as that may seem amid the present state of the European economy). You see, valuations among Europe’s markets—based on next year’s estimated earnings—reflect a noticeable discount to the U.S. market. And while the U.S. Central Bank is on the cusp of (albeit slightly) tightening monetary policy, the ECB is moving firmly in the opposite direction. Now, as you may know, my economic rearing makes me no believer in the notion that nations can print away their long-term problems. As a watcher of markets, however, I know that traders are indeed believers. And, frankly, QE or not, I’m guessing that Europe’s teeter totter economies will, on balance, settle into a better growth trajectory as next year unfolds.

Not to say that by upping our exposure to European stocks we’ll realize out-sized returns in 2015, or that, in the event of a bear market, owning attractively-valued foreign securities will lessen the pain (could exacerbate it), it makes sense to me to own Europe at these levels. I am, of course, assuming that “we” remain long-term investors (patient, that is) and are very comfortable with volatility.

Oil:

The price of a barrel of oil has been bouncing all around $50 of late, while inventories have been building like there's no tomorrow---up another 8.4 million barrels last week alone, remaining at an 80-year high. Not only does this ongoing build suggest that prices are anything but poised to move higher, we can make the case that there's a decent chance of another good leg lower before it all shakes out---despite the futures curve showing $60 by year's end.

You see, there are these speculators who have the foresight, and the funding, to buy up physical oil and simply stick it in storage in the hopes that they'll sell it later in the year for a cool 20+% profit. But what happens if we run out of storage capacity? What happens to the price when the market has to absorb all that excess production, and those speculators (perhaps) give up and get out of those losing positions? That's right, the price plummets. Could happen!

I'll bet you're wondering how oil prices can remain so low while the cost of filling your tank has been on the rise. Well, primarily (at present), that would have to do with refining. And I suspect the ongoing USW refinery workers' strike (the magnitude of which hasn't been seen in 35 years) is impacting output, along with the seasonal retooling for summer-grade gasoline.

The Consumer:

Depending on whether you're tracking Bloomberg's weekly consumer comfort survey or The University of Michigan's monthly consumer confidence index---or, mortgage apps or new home sales---consumer confidence is either waning or improving. Given a vastly improving jobs market, and still-lower-than-last-year energy prices, I'm thinking the consumer is feeling pretty good about his/her prospects going forward. 

Europe: 

See "Central Banks" above... And let me add that the Eurozone has begun showing real economic signs of life of late. Next week's calendar is full of releases that should give us a pretty good picture of how the Eurozone members are faring.

The Stock Market:

Here’s a look at the year-to-date results for the major U.S. indices, and non-US indices using index ETFs as our proxies (according to Morningstar and Bloomberg):

Dow Jones Industrials:  +2.21%

S&P 500:  +2.57%

NASDAQ Comp:  +5.02%

EFA (Europe, Australia and Far East):  +7.00%

FEZ (Eurozone):  +6.51%

VWO (Emerging Markets):  +4.45%

Sector ETFs:

Here’s a look at the year-to-date results for a number of sector ETFs:

XLB (MATERIALS):  +8.13%

XHB (HOMEBUILDERS):  +6.51%

IYH (HEATHCARE):  +6.16%

XLY (DISCRETIONARY):  +5.29%

XLK (TECH):  +4.21%

XLP (CONS STAPLES):  +3.19%

XLI (INDUSTRIALS):  +1.61%

XLE (ENERGY):  -0.18%

IYT (TRANSP):  -1.09%

XLF (FINANCIALS):  -1.54%

XLU (UTILITIES):  -4.21%

To put the inevitable (volatility and down markets) into perspective, allow me to repeat last week’s comments:

In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!

One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

The Bond Market:

The yield on the 10-year treasury bond declined .12% last week to 1.99%. You can no doubt thank Janet Yellen, per the above, for last week's rally in bond prices.

Bond bulls cite softer economic data of late and virtually no risk of rising inflation anytime soon---not to mention record low yields on other nations' debt---as sufficient to keep rates very low for a very long time going forward. And while that all makes sense, if we cast just a bit deeper we can fish out a few things that would legitimately question their understandable sanguinity:

As for the somewhat softer data of late, yes, clearly, sentiment in the manufacturing sector has been waning---still positive, just less so recently. But when we consider the complexion of the U.S. economy, it makes little sense to focus primarily on manufacturing. Not when the service sector accounts for 80+% of U.S. economic activity and provides better than 80% of all U.S. jobs. When we focus our attention there, suddenly things look pretty darn good and we begin to wonder if the inflation doves aren't missing something.

Here are a few excerpts on the service sector activity from last week's notes:

MARKIT'S FLASH SERVICES PMI speaks hugely to the employment picture going forward---as U.S. employment is primarily service-based. It also speaks to the health of the U.S. consumer, as the U.S. economy is indeed service-based. Here's Markit's chief economist:

“Stronger growth of service sector activity in February puts a June Fed rate rise firmly back on the table.

“While parts of the East coast have struggled in the face of adverse weather, other regions basked in unusually warm temperatures, boosting business above seasonal norms. Activity levels surged higher and inflows of new business boomed as a result.

“Alongside the upturn signaled by the sister ‘flash’ manufacturing PMI survey, the improved performance of the service sector in February means the economy looks to be enjoying yet another spell of robust growth in the first quarter. The two PMI surveys are so far running at a level consistent with at least 3.0% annualized GDP growth. While the overall rate of business expansion has cooled from the surging pace seen in the middle of last year, growth remains buoyant and, importantly, strong enough to drive yet another month of impressive job creation.

“The Fed will no doubt be encouraged by the resilience of the economy in the face of global headwinds such as the Greek and Russian crises, and increasingly minded to start the process of normalizing monetary policy in June on the basis of these impressive survey results.”

THE RICHMOND FED SERVICE SECTOR SURVEY, contrary to the 5th District's manufacturing survey results, shows activity expanding in February. Continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy.

Here's the Richmond Fed's overview:

Service sector activity expanded at a moderate pace in February, according to the latest survey by the Federal Reserve Bank of Richmond. Revenues strengthened overall, with slightly slower retail sales, even as big-ticket sales improved and shopper traffic picked up. Retail inventories grew about on pace with a month ago. Looking ahead to the next six months, survey participants expected increased demand for their goods and services.

Employment in the sector slowed. Retail employment rose modestly while hiring at non-retail establishments was nearly flat. Average wages increased solidly, albeit more slowly than in January.

Prices rose at a slower pace in February. Survey participants expected prices would increase more rapidly during the next six months.

THE DALLAS FED'S SERVICE OUTLOOK SURVEY, very much like the Richmond Fed's results, in that it contradicts Monday's Dallas Fed's Manuf Survey, expanded in February. To repeat: Continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy. Apparently Texas's dependence on oil production isn't quelling optimism in the service sector. Here's the Dallas Fed's overview:

Texas service sector activity continued to reflect expansion in February, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, edged up from 12.1 to 13.6 but remained below its 2014 average.

Labor market indicators reflected faster employment growth and slightly longer workweeks. The employment index rose from 5.8 to 12 in February, indicating hiring picked up pace this month. The hours worked index was unchanged at 1.4 this month, suggesting work hours increased at the same pace as in January.

Perceptions of broader economic conditions reflected slightly more optimism in February. The general business activity index rebounded from a negative reading last month to 1.7. The company outlook index moved up from 0.3 to 3.5, with 18 percent of respondents reporting that their outlook improved from last month and 14 percent noting that it worsened.

Price and wage pressures increased slightly this month. The selling prices index ticked up a point to 3.9. The wages and benefits index rose slightly from 13.5 to 15.4, although the great majority of firms continued to note no change in compensation costs.

Respondents’ expectations regarding future business conditions reflected more optimism in February. The index of future general business activity edged up from 6.1 to 8.9. The index of future company outlook rose from 8.8 to 14.3. Indexes of future service sector activity, such as future revenue and employment, remained in solid positive territory this month.

THE CPI FOR JANUARY came in down .7%. But that was all about energy prices. Ex-food and energy, the core was up .2% month-over-month. While recent inflation numbers embolden those who'd prefer the Fed not raise the Fed Funds rate this year, if ever, when we look at the rise in prices in the sector that matters most in the U.S., services (comprises more than 80% of the U.S. economy and, btw, produces more than 80% of U.S. jobs), we see inflation running at 2.5%, which is 25% above the Fed's target! My concern is that should wage inflation takeoff (we're now seeing real gains) and, say, oil bottom around the same time, inflation becomes a real concern---and the Fed Funds rate is at zero. Truly, we'd see rates rise in a hurry and financial markets get creamed... You couldn't pay me to own bonds in this environment.

And, once again, here's my weekly repeat on the bond market:

... complacency can be a very dangerous thing. In my view U.S. bond investors have been the definition of complacent for a very long time. And who can blame them when the U.S. economy, until recently, has delivered probably the most sluggish expansion in its history and the rest of the developed world is sporting interest rates near zero, or below. I.e., there’s been little risk of inflation here at home, and the U.S. treasury has offered the most attractive yields among the world’s safest debt issuers. Not to mention how the strengthening dollar has enticed foreign investors into the U.S. bond market.

So what might alter the debt investor’s paradigm and inspire him to give up his treasury bonds? Well, it could be a number of things. Not the least of which would be signs that the U.S. economy is gaining momentum and that the Fed will have to begin raising interest rates sooner than later. Bond prices took it in the chin last week as the yield on the 10-year treasury jumped from 1.66% to 1.95% (that’s a 17% increase). Another excuse would be a sudden decline in the dollar (I know, that contradicts the present economic backdrop and the prospects for higher interest rates. But the consensus lives in that camp, and the consensus is very often wrong). Should, let’s say, the Eurozone begin to show real signs of life and, thus, the Euro begin to gain against the dollar, we could see money fly out of treasuries in a big way as those carry-traders (they borrow in low-yielding, declining currencies and invest in higher yielding, strengthening currencies) rush to exit their positions: A reversal in the currency exchange trend can be a killer (say you borrowed 1 Euro and lent it in the U.S. at a $1.12 exchange rate. If the dollar moves to $1.20/Euro, you no longer have enough dollars to pay back your Euro loan).

Suffice it to say that the bond market (as well as other interest-rate-sensitive sectors [think utilities]) is in a precarious position these days. Short-term rates at zero while the economy is gaining momentum is an utterly unsustainable scenario.

 

Here are last week’s U.S. economic highlights:

FEBRUARY 23, 2015

THE CHICAGO FED NATIONAL ACTIVITY INDEX edged up .13 in January versus down .07 in December.  In Summary: Employment-related indicators contributed .18 in January. Production-related indicators contributed .02. Consumption and housing contributed -.10. Three of the four broad components made positive contributions from December. The historical line graph remains positive, from a past pre-recession indication standpoint.

EXISTING HOME SALES, while higher year-on-year, decreased in January (on a month-to-month) basis to their lowest rate in 9 months. The NAR's chief economist speaks to the obvious headwind posed by low inventory and rising prices:

Lawrence Yun, NAR chief economist, says the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country. “January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows,” he said. “Realtors® are reporting that low rates are attracting potential buyers, but the lack of new and affordable listings is leading some to delay decisions.”

Comparing today's housing fundamentals to long-term averages and the 2007 speak paints a bullish picture for housing going forward---despite recent softness.

THE DALLAS FED MANUFACTURING SURVEY posted its second month of no growth in February. The report was pretty negative across the board. I suspect the plunge in oil prices is impacting sentiment in Texas. Here's the Dallas Fed's overview:

Texas factory activity posted a second month of no growth in February, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained near zero (0.7) and indicated output was essentially unchanged from January levels.

Other measures of current manufacturing activity reflected contraction in February. The new orders index pushed further into negative territory, coming in at -12.2, its lowest reading since June 2009. The shipments index fell to -3.3, also reaching a low not seen since 2009. The capacity utilization index turned negative as well, dropping from 5.1 to -4.9.

Perceptions of broader business conditions remained rather pessimistic this month. The general business activity index moved further negative to -11.2, posting its lowest reading in nearly two years. The company outlook index remained slightly negative and edged down from -3.8 to -4.4.

Labor market indicators reflected only minor employment growth and slightly shorter workweeks. The February employment index moved down from 9 to 1.3. Fifteen percent of firms reported net hiring, compared with 14 percent reporting net layoffs. The hours worked index edged further into negative territory, coming in at -1.6.

Prices fell slightly in February and upward pressure on wages continued to ease. The raw materials prices index held steady at -1.7, indicating marginal downward pressure on input costs. The finished goods prices index was also slightly negative but edged up from -6.7 to -4.4. Manufacturers are no longer expecting sizeable price increases six months ahead, as the indexes of future prices were in single digits this month, down markedly from 2014 readings. The wages and benefitsindex edged down for a second month in a row and came in at 16.8.

Expectations regarding future business conditions rebounded somewhat in February. The index of future general business activity shot up 12 points to 5.5 after posting a negative reading in January. The index of future company outlook rose nearly 10 points to 11.8, although it remains well below the index level seen throughout 2014. Indexes for future manufacturing activity showed mixed movements in February but remained in solidly positive territory.

FEBRUARY 24, 2015

THE S&P CASE-SHILLER HOME PRICE INDEX shows prices on the rise. Which makes perfect sense given the present lack of inventory. Up 4.5% year over year. In theory, rising prices should bring more sellers, and hence, more inventory to market.

THE JOHNSON REDBOOK RETAIL REPORT shows year-on-year growth slowing to 2.8%, versus 3.2% last week. Here's Econoday's summary:

Chain-store sales slowed to year-on-year growth of plus 2.8 percent in the February 21 week, down from 3.2 percent in the prior week. The reporting week was unusually cold in many parts of the country. Still, February is showing strength relative to January in Redbook's sample, at plus 0.8 percent that points to strength for core retail sales in February (ex-auto ex-gas).

MARKIT'S FLASH SERVICES PMI speaks hugely to the employment picture going forward---as U.S. employment is primarily service-based. It also speaks to the health of the U.S. consumer, as the U.S. economy is indeed service-based. Here's Markit's chief economist:

Williamson, chief economist at Markit said:

“Stronger growth of service sector activity in February puts a June Fed rate rise firmly back on the table.

“While parts of the East coast have struggled in the face of adverse weather, other regions basked in unusually warm temperatures, boosting business above seasonal norms. Activity levels surged higher and inflows of new business boomed as a result.

“Alongside the upturn signaled by the sister ‘flash’ manufacturing PMI survey, the improved performance of the service sector in February means the economy looks to be enjoying yet another spell of robust growth in the first quarter. The two PMI surveys are so far running at a level consistent with at least 3.0% annualized GDP growth. While the overall rate of business expansion has cooled from the surging pace seen in the middle of last year, growth remains buoyant and, importantly, strong enough to drive yet another month of impressive job creation.

“The Fed will no doubt be encouraged by the resilience of the economy in the face of global headwinds such as the Greek and Russian crises, and increasingly minded to start the process of normalizing monetary policy in June on the basis of these impressive survey results.”

THE CONFERENCE BOARD CONSUMER CONFIDENCE SURVEY declined to 96.4 in February from January's 103.8. While February's result were indeed a retreat, they came off of a robust move in January. All in all the consumer remains generally positive, just not as positive in January, about the future. Here's CB's director on February's results:

“After a large gain in January, consumer confidence retreated in February, but still remains at pre-recession levels (September 2007, Index, 99.5). Consumers’ assessment of current conditions remained positive, but short-term expectations declined. While the number of consumers expecting conditions to deteriorate was virtually unchanged, fewer consumers expect conditions to improve, prompting a less upbeat outlook. Despite this month’s decline, consumers remain confident that the economy will continue to expand at the current pace in the months ahead.”

THE RICHMOND FED MANUFACTURING SURVEY shows activity slowing in February. Here's the Richmond Fed's overview:

Fifth District manufacturing activity slowed in February, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments and the volume of new orders flattened, while the backlog of orders declined. Hiring in the sector was weak and the average workweek shrank, although wage growth advanced modestly. Despite the soft current conditions, producers were upbeat about future business opportunities. Expectations were for solid increases in shipments and new orders in the six months ahead, with greater capacity utilization. In addition, manufacturers looked for a build-up in backlogged orders and minimal vendor lead-times.

Compared to January's outlook, producers expected slower employment growth and less growth in the average workweek. Although wage growth expectations remained solid in February, the outlook was less robust than a month earlier.

Prices of raw materials and finished goods were little changed in February. Looking ahead, manufacturers expected slower price growth over the next six months than they had a month ago.

THE RICHMOND FED SERVICE SECTOR SURVEY, contrary to the 5th District's manufacturing survey results, shows activity expanding in February. continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy. Here's the Richmond Fed's overview:

Service sector activity expanded at a moderate pace in February, according to the latest survey by the Federal Reserve Bank of Richmond. Revenues strengthened overall, with slightly slower retail sales, even as big-ticket sales improved and shopper traffic picked up. Retail inventories grew about on pace with a month ago. Looking ahead to the next six months, survey participants expected increased demand for their goods and services.

Employment in the sector slowed. Retail employment rose modestly while hiring at non-retail establishments was nearly flat. Average wages increased solidly, albeit more slowly than in January.

Prices rose at a slower pace in February. Survey participants expected prices would increase more rapidly during the next six months.

THE DALLAS FED'S SERVICE OUTLOOK SURVEY, very much like the Richmond Fed's results, in that it contradicts Monday's Dallas Fed's Manuf Survey, expanded in February. To repeat: continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy. Apparently Texas's dependence on oil production isn't quelling optimism in the service sector. Here's the Dallas Fed's overview:

Texas service sector activity continued to reflect expansion in February, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, edged up from 12.1 to 13.6 but remained below its 2014 average.

Labor market indicators reflected faster employment growth and slightly longer workweeks. The employment index rose from 5.8 to 12 in February, indicating hiring picked up pace this month. The hours worked index was unchanged at 1.4 this month, suggesting work hours increased at the same pace as in January.

Perceptions of broader economic conditions reflected slightly more optimism in February. The general business activity index rebounded from a negative reading last month to 1.7. The company outlook index moved up from 0.3 to 3.5, with 18 percent of respondents reporting that their outlook improved from last month and 14 percent noting that it worsened.

Price and wage pressures increased slightly this month. The selling prices index ticked up a point to 3.9. The wages and benefits index rose slightly from 13.5 to 15.4, although the great majority of firms continued to note no change in compensation costs.

Respondents’ expectations regarding future business conditions reflected more optimism in February. The index of future general business activity edged up from 6.1 to 8.9. The index of future company outlook rose from 8.8 to 14.3. Indexes of future service sector activity, such as future revenue and employment, remained in solid positive territory this month.

THE API WEEKLY CRUDE STOCK continues to show huge adds to inventory. Last week to the tune of 8.9 million barrels. Gasoline declined by 1.6 mbs and distillates declined by 2.4 mbs.

FEBRUARY 25, 2015

MORTGAGE APPLICATIONS decreased 3.5% last week. However, purchase apps bucked the recent trend, jumping 5% week over week. As I've stressed consistently of late, I see real potential for the housing market going forward. Despite recent softness.

NEW HOMES SALES in January came in better than expected, at annual pace of 481,000.

EIA WEEKLY CRUDE INVENTORIES show no letting up whatsoever in production... Up 8.42 million barrels last week. Gasoline inventories decined 3.118 mbs and distillates declined 2.711 mbs.

FEBRUARY 26, 2015

DURABLE GOODS ORDERS for January broke a two-month streak of declines by rising 2.8%. Transportation led the way with a 9.1% increase. Ex-transportation orders grew only .3%. Of concern is the continued build in inventories. While the 9.5% increase in capital goods orders would be a positive, given what it says about expansion and productivity going forward. Here's from the Census Bureau's report:

New Orders

New orders for manufactured durable goods in January increased $6.5 billion or 2.8 percent to $236.1 billion, the U.S. Census Bureau announced today. This increase, up following two consecutive monthly decreases, followed a 3.7 percent December decrease. Excluding transportation, new orders increased 0.3 percent. Excluding defense, new orders increased 3.0 percent. Transportation equipment, also up following two consecutive monthly decreases, led the increase, $6.0 billion or 9.1 percent to $72.1 billion.

Shipments

Shipments of manufactured durable goods in January, down three of the last four months, decreased $2.7 billion or 1.1 percent to $245.1 billion. This followed a 1.5 percent December increase. Transportation equipment, down two of the last three months, led the decrease, $1.3 billion or 1.7 percent to $73.9 billion.

Unfilled Orders

Unfilled orders for manufactured durable goods in January, down two consecutive months, decreased $2.0 billion or 0.2 percent to $1,163.4 billion. This followed a 0.9 percent December decrease. Transportation equipment, also down two consecutive months, led the decrease, $1.9 billion or 0.3 percent to $736.8 billion.

Inventories

Inventories of manufactured durable goods in January, up twenty-one of the last twenty-two months, increased $1.8 billion or 0.4 percent to $412.5 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.5 percent December increase. Transportation equipment, also up twenty-one of the last twenty-two months, led the increase, $0.7 billion or 0.5 percent to $134.4 billion.

Capital Goods

Nondefense new orders for capital goods in January increased $6.9 billion or 9.5 percent to $79.8 billion. Shipments increased $0.8 billion or 1.0 percent to $80.2 billion. Unfilled orders decreased $0.5 billion or 0.1 percent to $731.0 billion. Inventories increased $0.2 billion or 0.1 percent to $186.9 billion. Defense new orders for capital goods in January decreased $0.4 billion or 5.2 percent to $7.6 billion. Shipments decreased $1.3 billion or 12.0 percent to $9.2 billion. Unfilled orders decreased $1.7 billion or 1.1 percent to $153.4 billion. Inventories increased $0.2 billion or 0.7 percent to $24.2 billion.

Revised December Data

Revised seasonally adjusted December figures for all manufacturing industries were: new orders, $470.6 billion (revised from $471.5 billion); shipments, $488.7 billion (revised from $488.2 billion); unfilled orders, $1,165.5 billion (revised from $1,166.9 billion); and total inventories, $653.1 billion (revised from $653.9 billion). 

REAL EARNINGS increased substantially above expectations in January (1.2% month-over-month vs .3% expected). This of course speaks to the falling rate of inflation (when we count energy). Year-over-year real earnings increased by 3.0% (2.4% earnings + .6% average workweek).

THE CPI FOR JANUARY came in down .7%. But that was all about energy prices. Ex-food and energy, the core, was up .2% month-over-month. While recent inflation numbers embolden those who'd prefer the Fed not raise the Fed Funds rate this year, if ever, when we look at the rise in prices in the sector that matters most in the U.S., services (comprises more than 80% of the U.S. economy and, btw, produces more than 80% of U.S. jobs), we see inflation running at 2.5%, which is 25% above the Fed's target! My concern is that should wage inflation takeoff (we're now seeing real gains) and, say, oil bottom around the same time, inflation becomes a real concern---and the Fed Funds rate is at zero. Truly, we'd see rates rise in a hurry and financial markets get creamed... You couldn't pay me to own bonds in this environment.

WEEKLY JOBLESS CLAIMS jumped 31,000 last week to 313,000. The 4-week moving averages (puts the noisy weekly data into better [trendingly speaking] perspective) stands at a comfortable (historically-speaking) 294,500. Continuing claims total 2,401, down 21k from prior reading.

THE FHFA HOUSE PRICE INDEX shows prices rose .8% in December and 4.9% year over year. As suggested below, low inventories, along with a better labor market are pushing home prices higher. In theory, higher prices should inspire new sellers (existing homes, and new construction) into the market, alleviating the inventory issue.

“Contrary to prior indications of a possible slowdown, home price appreciation in the fourth quarter was relatively strong,” said FHFA Principal Economist Andrew Leventis.  “The key drivers of appreciation over the last few years—low inventories of homes available for sale and improvement in labor markets—likely played a role in driving up prices during the quarter.”

THE BLOOMBER CONSUMER COMFORT SURVEY strongly suggests that the price of a gallon of gas is a serious influence on the personal outlook of the U.S. consumer.  The report also sites sluggish wage growth, however I suspect that's a trend that'll soon be improving. Here's from the press release:

Consumer Comfort Falls to 2015 Low as View of U.S. Economy Dims

By Nina Glinski

(Bloomberg) -- Consumer sentiment retreated last week to the lowest level of the year as Americans’ views of the economy and their finances dimmed.

The Bloomberg Consumer Comfort Index fell to 42.7 in the period ended Feb. 22 from 44.6 a week earlier. The 1.9-point decline was the biggest since May 2014. A gauge of the current state of the economy slumped by the most in almost four years.

Confidence has deteriorated in three of the last four weeks as gasoline prices started climbing from the lowest level since 2009. Sentiment is also being restrained by what Federal Reserve Chair Janet Yellen this week called “sluggish” wage growth, even as the labor market continues to improve.

The drop in in sentiment last week coincided with “still largely stagnant wages, tough sledding in the stock market and a recent rise in gas prices after a record four-month decline,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg.

The measure of Americans’ views of the economy dropped 3.2 points, the most since March 2011, to an eight-week low of 35.7. The gauge of personal finances fell to 53.8, also the weakest reading this year, from 56.6. It was the fourth straight decline.

A gauge of the buying climate, which shows whether now is a good time to make purchases, was little changed.

Households are becoming less enthusiastic as prices at the gas pump rebound from an almost six-year low at the end of January. The average price of a gallon of regular fuel was $2.33 on Feb. 24, up from $2.03 on Jan. 25. It’s still a dollar a gallon cheaper than the five-year average price of $3.33.

NATURAL GAS INVENTORIES declined last week by 219 billion cubic feet.

THE KANSAS CITY FED MANUFACTURING INDEX showed that " Tenth District manufacturing activity expanded just slightly in February, but producers expected activity to pick up moderately in the months ahead. Most price indexes continued to decrease, with several reaching their lowest $4.487 trillion.

M2 MONEY SUPPLY grew by $29 billion last week.

FEBRUARY 27, 2015

Q4 GDP (the second estimate) came in at 2.2%, just above the consensus estimate of 2.1%. This is off .4% from last month's advance Q4 reading. The downward revision reflects more complete data showing private inventory investment increasing less than the advance estimate, while nonresidential fixed investment (capital investment) increased more than estimated last month (but not enough to offset the decline in inventories). This comes after a huge 5% jump in GDP in Q3.

The price index for gross domestic purchases decreased .1% in Q4. Ex-food and energy, the price index increased .7%. Services increased 4.1%.

Consumer spending increased 4.2%.

THE CHICAGO PMI INDEX for February came in at 45.8, which was shockingly lower than the consensus estimate of 58.7. This is the lowest reading since July 2009. The report blames the decline on bad weather along with the West Coast port slowdown. This glaringly contradicts other anecdotal evidence to the point that it probably should be dismissed, in acceptance of the bad weather and port issues.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX for February tells a different story than did this week's Bloomberg Consumer Comfort Index. While Bloomberg's survey shows waning optimism among consumers (although Bloomberg's is a weekly survey), the University of Michigan survey has consumer sentiment improving sharply, at 95.4 versus 93.6 in January. Here's Econoday:

The sharpest moves are in the current conditions component which rose to 106.9 from 103.1 at mid month. This puts the pace for the last two weeks in the 109 area which is little changed from January's final reading of 109.3. This component points to steady rates of consumer activity for February compared to January.

The expectations component rose 1.5 points from mid-month to 88.0, pointing to a nearly 90 pace over the last two weeks. The final reading for January was 91.0. Note that expectations typically hinge on the outlooks for employment and income.

Inflation expectations are unchanged from mid-month, at 2.8 percent for the 1-year outlook and 2.7 percent for the 5-year outlook. The 1-year rate is up 3 tenths from January while the 5-year rate is down 1 tenth.

February readings on consumer spirits had been on the decline before today's report, one that underscores consumer strength, strength derived from the strong jobs market.

THE NAR PENDING HOME SALES INDEX, unlike certain other housing indicators of late, supports my optimism over the housing sector going forward. Climbing 1.7% to 104.2 in January, which is its highest reading since August 2013. Here's NAR's chief economist on January's positive results and his concerns over a lack of inventory:

Lawrence Yun, NAR chief economist, says for the most part buyers in January were able to overcome tight supply to sign contracts at a pace that highlights the underlying demand that exists in today's market. “Contract activity is convincingly up compared to a year ago despite comparable inventory levels,” he said. “The difference this year is the positive factors supporting stronger sales, such as slightly improving credit conditions, more jobs and slower price growth.”

Yun also points to more favorable conditions for traditional buyers entering the market. All-cash sales and sales to investors are both down from a year ago1, creating less competition and some relief for buyers who still face the challenge of limited homes available for sale.

“All indications point to modest sales gains as we head into the spring buying season,” says Yun. “However, the pace will greatly depend on how much upward pressure the impact of low inventory will have on home prices. Appreciation anywhere near double-digits isn't healthy or sustainable in the current economic environment.”