The most important economic data this week should be the Q418 Real
GDP report on Thursday. A print like the Atlanta Fed model's 1.4%
projection would boost expectations of a slowdown ahead in economic
growth. Even a consensus-like print of 2.4% could support these
expectations if the composition shows inventory investment close to the
high level of Q318. But, the real question is whether the weakness seen
in some December data resulted from temporary factors, such as the
government shutdown, and will reverse during H119.
Some
weak spots continued in January. In particular, the motor vehicle
sector pulled back production sharply as sales fell. It probably
contributed to the run-up in Unemployment Claims in late January and
early February, as well as to the declines posted by some manufacturing
surveys so far in February. The risk, at this point, is for a decline
in the February Mfg ISM, due Friday. Consensus looks for a decline to
55.9 from 56.6.
This weakness, however, may not
persist. The drop in Initial Claims in the latest week raises the
possibility that the worst is over. At 216k, Initial is back to being
under the Q418 average (219k). It is too soon to say whether they will
stay low. But, if they do as we move into March, a bounce-back in Q219
Real GDP Growth will become more conceivable.
Unemployment Claims
Initial (000s) Continuing (Mn)
2019 2018 2019 2018
Q4 219 238 1.63 1.91
Jan 220 234 1.71 1.95
Feb 230 221 1.75 1.91
latest wk 216 1.73
A
speedup in economic growth could be accompanied by a pickup in
inflation. Commodity prices already have come off their recent lows.
If the US and China strike a trade deal that eliminates last year's
tariffs, the dollar is likely to fall. This should put further upward
pressure on commodity prices as well as lift import prices (particularly
those that were not subject to the tariffs). And, wage inflation
could pick up, a risk highlighted by NY Fed President Williams in his
speech on Friday. Calendar considerations point to a high 0.3% m/m
increase in February Average Hourly Earnings, due March 8.
Sunday, February 24, 2019
Monday, February 18, 2019
Why is the Stock Market Ignoring Signs of a US Economic Slowdown?
The stock market appears to be ignoring signs of a US economic slowdown. December Retail Sales were a disaster, but more importantly Unemployment Claims are rising and Manufacturing Output -- particularly auto assemblies -- took a hit in January.
The market's seeming lack of reaction to bad macroeconomic news is parallel to its failure to be boosted by good macroeconomic news in Q418. In both cases, the market focused on the outlook rather than current conditions. And, shifts in Fed policy and Trump's stance on US/China trade negotiations changed the outlook from being negative in Q418 to being positive now.
Another way to view the change is using an "optimal control" perspective. This perspective says the financial markets tend to move in ways consistent with the Fed's goals. In Q418, the Fed was tightening, saying the growth outlook was too strong to prevent inflation from picking up. As a result, stocks fell and longer-term Treasury yields rose, working to slow the economy. In January, the Fed backtracked, emphasizing downside risks to the outlook. So, stocks rose and longer-term yields fell -- moving in directions that would lift economic growth ahead.
There are three ways the current market moves can end, if not reverse. First, the Fed could be slow to react to increasing signs of slower US economic growth. It would suggest officials are comfortable with the slower pace. Second, US economic growth could speed up, making a boost from the financial markets unnecessary. Third, the stocks could overshoot on the high side and pull back.
Right now, evidence of weaker economic growth has grabbed the headlines. Although the extraordinary plunge in December Retail Sales received the bulk of attention last week, the more troubling piece of data was the increase in Unemployment Claims. They represent the most significant evidence so far that US economic growth is slowing.
The drop in December Retail Sales cannot be easily explained. The Commerce Department said the government shutdown did not affect the collection or processing of the data. Possibly retailers had problems reporting the data. Or, possibly people who were out of work either directly or indirectly because of the shutdown stopped buying goods or going to restaurants. There could be other, technical factors behind the plunge, as well. Presumably, part of the sales plunge should show up in a jump in retail inventories (due March 11). In the meantime, the Atlanta Fed model's projection of Q418 Real GDP Growth is now down to 1.5% from 2.7%, due to the Retail Sales data.
If the plunge in sales was one-off, it will reverse in January. This would result in sharp volatility in the q/q GDP growth rates, making an average of Q418 and Q119 Real GDP Growth the more accurate measure.
The Claims data, however, suggest at least some of the December weakness in Retail Sales was not temporary. Claims should now be falling if their recent run-up stemmed from the government shutdown. Instead, both Initial and Continuing rose in last week's report, keeping them well above the Q418 average. In contrast, Claims came off their winter highs in February 2018, signalling a post-winter speedup in Real GDP Growth. This year, there is no such evidence from Claims.
Unemployment Claims
Initial (000s) Continuing (Mn)
2019 2018 2019 2018
Q4 219 238 1.63 1.91
Jan 220 234 1.71 1.95
Feb 237 221 1.77 1.91
Mar na 228 na 1.86
Q2 na 223 na 1.76
Weakness in the manufacturing sector was likely at least partly responsible for the recent increase in Claims. Friday's January Industrial Production report showed an overall softening in manufacturing output, led by a drop in motor vehicle assemblies. Motor vehicle sales also fell that month, so the cut in output may be more than just a temporary inventory correction.
The February Employment Report, due March 8, could be another important clue of an economic slowdown. Payrolls could slow sharply if some of the January job surge was due to the mild winter. An unwinding of a weather-related jump in January Payrolls tends to show up in March, however.
The market's seeming lack of reaction to bad macroeconomic news is parallel to its failure to be boosted by good macroeconomic news in Q418. In both cases, the market focused on the outlook rather than current conditions. And, shifts in Fed policy and Trump's stance on US/China trade negotiations changed the outlook from being negative in Q418 to being positive now.
Another way to view the change is using an "optimal control" perspective. This perspective says the financial markets tend to move in ways consistent with the Fed's goals. In Q418, the Fed was tightening, saying the growth outlook was too strong to prevent inflation from picking up. As a result, stocks fell and longer-term Treasury yields rose, working to slow the economy. In January, the Fed backtracked, emphasizing downside risks to the outlook. So, stocks rose and longer-term yields fell -- moving in directions that would lift economic growth ahead.
There are three ways the current market moves can end, if not reverse. First, the Fed could be slow to react to increasing signs of slower US economic growth. It would suggest officials are comfortable with the slower pace. Second, US economic growth could speed up, making a boost from the financial markets unnecessary. Third, the stocks could overshoot on the high side and pull back.
Right now, evidence of weaker economic growth has grabbed the headlines. Although the extraordinary plunge in December Retail Sales received the bulk of attention last week, the more troubling piece of data was the increase in Unemployment Claims. They represent the most significant evidence so far that US economic growth is slowing.
The drop in December Retail Sales cannot be easily explained. The Commerce Department said the government shutdown did not affect the collection or processing of the data. Possibly retailers had problems reporting the data. Or, possibly people who were out of work either directly or indirectly because of the shutdown stopped buying goods or going to restaurants. There could be other, technical factors behind the plunge, as well. Presumably, part of the sales plunge should show up in a jump in retail inventories (due March 11). In the meantime, the Atlanta Fed model's projection of Q418 Real GDP Growth is now down to 1.5% from 2.7%, due to the Retail Sales data.
If the plunge in sales was one-off, it will reverse in January. This would result in sharp volatility in the q/q GDP growth rates, making an average of Q418 and Q119 Real GDP Growth the more accurate measure.
The Claims data, however, suggest at least some of the December weakness in Retail Sales was not temporary. Claims should now be falling if their recent run-up stemmed from the government shutdown. Instead, both Initial and Continuing rose in last week's report, keeping them well above the Q418 average. In contrast, Claims came off their winter highs in February 2018, signalling a post-winter speedup in Real GDP Growth. This year, there is no such evidence from Claims.
Unemployment Claims
Initial (000s) Continuing (Mn)
2019 2018 2019 2018
Q4 219 238 1.63 1.91
Jan 220 234 1.71 1.95
Feb 237 221 1.77 1.91
Mar na 228 na 1.86
Q2 na 223 na 1.76
Weakness in the manufacturing sector was likely at least partly responsible for the recent increase in Claims. Friday's January Industrial Production report showed an overall softening in manufacturing output, led by a drop in motor vehicle assemblies. Motor vehicle sales also fell that month, so the cut in output may be more than just a temporary inventory correction.
The February Employment Report, due March 8, could be another important clue of an economic slowdown. Payrolls could slow sharply if some of the January job surge was due to the mild winter. An unwinding of a weather-related jump in January Payrolls tends to show up in March, however.
Monday, February 11, 2019
This Week's US Economic Data and a Possible Slowdown
The markets will likely remain fixated on the risk of slow global and US economic growth as the March 1 tariff deadline approaches. This week's US economic data may very well keep the slowdown debate open, based on consensus estimates.
Expectations for real-side US economic data are mixed -- modest Retail Sales and strong Manufacturing Output. Consensus sees only a 0.2% m/m gain in December Ex Auto Retail Sales, below the +0.3% prior 3-month average. Some of the softness could reflect lower gasoline prices. So, what will be more important is whether Ex Auto/Ex Gasoline Retail Sales climb by less than their prior 0.4% 3-month average. Prior months' revisions could be important, as well. In contrast, consensus looks for a decent 0.4% m/m increase in January Manufacturing Output (part of Industrial Production). This would be slightly above the 0.3% Q418 average.
Inflation prints are not expected to be problematic. Consensus estimates of 0.1% m/m Total and 0.2% Core CPI for January would pull down their y/y's. The y/y would drop to 1.5% from 1.9% for Total. It would slip to 2.1% from 2.2%, according to consensus. But, a lower y/y for the Core CPI is possible -- a m/m print of 0.16-0.18% (rounding to 0.2% prints) would pull down Core's y/y to 2.0%. On the other hand, a 0.3% m/m print for Core CPI cannot be ruled out, as start-of-year price hikes could dominate -- as happened last year. For example, a number of pharmaceutical companies announced price hikes this month. The y/y would be steady at 2.2% in this case. However, a high print should be quickly dismissed by the markets, since it could be interpreted as temporary and, as a result, the Fed is unlikely to be influenced by it.
The most up-to-date measure of US economic activity, as always, will be Unemployment Claims data. They have been on the high side in the past 2 weeks. Consensus looks for a gradual unwinding to 225k Initial and 1.720 Mn Continuing in this Thursday's report -- still high but too soon to be conclusive regarding a slowdown. Until Initial moves below the 219k Q418 average, they will add to the risk of slower economic growth in Q119.
It is possible the recently high levels of Initial and Continuing Claims could be catch-up from processing delays caused by the government shutdown or could be filings by people impacted by the shutdown. In either case, the high levels should unwind in the next couple of reports -- and argue against a significant (if any) slowdown in Q119 economic growth.
Unemployment Claims (level)
Initial Continuing
Oct18 214k 1.635 Mn
Nov 222 1.668
Dec 222 1.707
Q418 219 1.670
Jan19 220 1.741
Jan 26 wk 253 1.736
Feb 1 wk 234 na
Expectations for real-side US economic data are mixed -- modest Retail Sales and strong Manufacturing Output. Consensus sees only a 0.2% m/m gain in December Ex Auto Retail Sales, below the +0.3% prior 3-month average. Some of the softness could reflect lower gasoline prices. So, what will be more important is whether Ex Auto/Ex Gasoline Retail Sales climb by less than their prior 0.4% 3-month average. Prior months' revisions could be important, as well. In contrast, consensus looks for a decent 0.4% m/m increase in January Manufacturing Output (part of Industrial Production). This would be slightly above the 0.3% Q418 average.
Inflation prints are not expected to be problematic. Consensus estimates of 0.1% m/m Total and 0.2% Core CPI for January would pull down their y/y's. The y/y would drop to 1.5% from 1.9% for Total. It would slip to 2.1% from 2.2%, according to consensus. But, a lower y/y for the Core CPI is possible -- a m/m print of 0.16-0.18% (rounding to 0.2% prints) would pull down Core's y/y to 2.0%. On the other hand, a 0.3% m/m print for Core CPI cannot be ruled out, as start-of-year price hikes could dominate -- as happened last year. For example, a number of pharmaceutical companies announced price hikes this month. The y/y would be steady at 2.2% in this case. However, a high print should be quickly dismissed by the markets, since it could be interpreted as temporary and, as a result, the Fed is unlikely to be influenced by it.
The most up-to-date measure of US economic activity, as always, will be Unemployment Claims data. They have been on the high side in the past 2 weeks. Consensus looks for a gradual unwinding to 225k Initial and 1.720 Mn Continuing in this Thursday's report -- still high but too soon to be conclusive regarding a slowdown. Until Initial moves below the 219k Q418 average, they will add to the risk of slower economic growth in Q119.
It is possible the recently high levels of Initial and Continuing Claims could be catch-up from processing delays caused by the government shutdown or could be filings by people impacted by the shutdown. In either case, the high levels should unwind in the next couple of reports -- and argue against a significant (if any) slowdown in Q119 economic growth.
Unemployment Claims (level)
Initial Continuing
Oct18 214k 1.635 Mn
Nov 222 1.668
Dec 222 1.707
Q418 219 1.670
Jan19 220 1.741
Jan 26 wk 253 1.736
Feb 1 wk 234 na
Sunday, February 3, 2019
Risks to the Long End of the Treasury Market
The potential non-inflationary growth rate of the US economy may be stronger than expected, after Friday's January Employment Report. And, foreign economic growth still looks to have slowed. But, the long end of the Treasury market risks facing inflation issues from commodity prices. The latter already have begun to climb in response to the Fed's aggressive shift away from tightening and the return of Chinese purchases.
A steeper Treasury curve could weigh on stocks at some point, as it could prompt market talk of a resumption of Fed tightening in H219. The steeper curve would probably be interpreted as predicting stronger growth and higher inflation ahead. Even without an increase in inflation, stronger trend growth should result in a higher level of interest rates.
There are some countervailing arguments near term. A Brexit crisis that impacts the European markets and FX would likely depress commodity prices and Treasury yields, but presumably this would be only temporary.
Another argument is that an end of the Fed's balance sheet reduction would prevent the Treasury curve from steepening. Some market observers have downplayed the immediate impact of the Fed's intention of ending its balance sheet reduction sooner than expected. They point out that the Fed has not yet stopped selling assets. They argue the markets will be impacted when the Fed actually begins pulling back from balance sheet reduction.
The Fed's own analysis when QE began suggests these observers are wrong. The analysis showed that the announcement of the total amount of QE was more important for the markets than the monthly pace of purchases. In other words, the "stock" of announced QE was more important than the actual "flow." So, the market impact of last week's FOMC Statement and Powell's testimony regarding balance sheet reduction essentially should be already built in.
A steeper Treasury curve could weigh on stocks at some point, as it could prompt market talk of a resumption of Fed tightening in H219. The steeper curve would probably be interpreted as predicting stronger growth and higher inflation ahead. Even without an increase in inflation, stronger trend growth should result in a higher level of interest rates.
There are some countervailing arguments near term. A Brexit crisis that impacts the European markets and FX would likely depress commodity prices and Treasury yields, but presumably this would be only temporary.
Another argument is that an end of the Fed's balance sheet reduction would prevent the Treasury curve from steepening. Some market observers have downplayed the immediate impact of the Fed's intention of ending its balance sheet reduction sooner than expected. They point out that the Fed has not yet stopped selling assets. They argue the markets will be impacted when the Fed actually begins pulling back from balance sheet reduction.
The Fed's own analysis when QE began suggests these observers are wrong. The analysis showed that the announcement of the total amount of QE was more important for the markets than the monthly pace of purchases. In other words, the "stock" of announced QE was more important than the actual "flow." So, the market impact of last week's FOMC Statement and Powell's testimony regarding balance sheet reduction essentially should be already built in.
Friday, February 1, 2019
January Employment a Potentially Significant Positive for Economy and Stock Market
iThe January Employment Report is a potentially significant positive for the economy and stock market. It raises the possibility that potential economic growth is stronger than the Fed’s assumption of 1.8-2.0%. This would mean not only that non-inflationary growth is higher than thought but so is potential profit growth. The key part of the report is not the huge +304k m/m jump in Payrolls, but the further increase in the Labor Force Participation Rate and associated uptick in the Unemployment Rate to 4.0%.
The increase in the Participation Rate could have been boosted by mild weather. But, being the 2nd increase in a row, it cannot be entirely dismissed. It means the supply side of the economy is expanding faster than population growth. The increase is even more significant, given the downtrend in the Rate suggested by the aging composition of the population. While both Civilian Employment and Labor Force fell m/m in January, the declines resulted from benchmark revisions to population. Without these revisions, BLS says Civilian Employment would have risen 237k m/m while Labor Force would have risen 259k. The benchmark revision had no effect on the Unemployment Rate. And, without the increase in the Participation Rate it would have fallen to 3.8%. Interestingly, the broadest measure of labor market slack — U-6 — actually jumped 0.5% pt to 8.1%.
The mild winter weather likely played an important role in boosting Payrolls this month. Job gains were strong in Construction, Educational Services (few school shutdowns), Leisure and Restaurants. Seasonals looked to offset weather-related job losses that did not occur.
Wage inflation remains in check. Average Hourly Earnings rose a modest 0.1% m/m, likely reflecting calendar considerations and an unwinding of December’s compositional boost. The y/y dipped to 3.2% from 3.3% — the pace in line with other labor cost measures.
The increase in the Participation Rate could have been boosted by mild weather. But, being the 2nd increase in a row, it cannot be entirely dismissed. It means the supply side of the economy is expanding faster than population growth. The increase is even more significant, given the downtrend in the Rate suggested by the aging composition of the population. While both Civilian Employment and Labor Force fell m/m in January, the declines resulted from benchmark revisions to population. Without these revisions, BLS says Civilian Employment would have risen 237k m/m while Labor Force would have risen 259k. The benchmark revision had no effect on the Unemployment Rate. And, without the increase in the Participation Rate it would have fallen to 3.8%. Interestingly, the broadest measure of labor market slack — U-6 — actually jumped 0.5% pt to 8.1%.
The mild winter weather likely played an important role in boosting Payrolls this month. Job gains were strong in Construction, Educational Services (few school shutdowns), Leisure and Restaurants. Seasonals looked to offset weather-related job losses that did not occur.
Wage inflation remains in check. Average Hourly Earnings rose a modest 0.1% m/m, likely reflecting calendar considerations and an unwinding of December’s compositional boost. The y/y dipped to 3.2% from 3.3% — the pace in line with other labor cost measures.
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