Today's US economic data -- NY Fed Empire State Mfg Index and the NAHB Housing Market Index -- came in below consensus but do not undermine the idea of a moderate pickup in GDP Growth in Q216. Besides being of minor importance, neither correlates well with broader measures of manufacturing or housing activity. The markets would be best to ignore them. Consensus is for stronger US economic data to print the rest of the week.
NY Fed Empire State Mfg Index
1. The drop in the Index to -9.02 in May from +9.6 in April is probably lagging the softening seen in the Mfg ISM in April. Consensus was for a decline to +6.5.
a. The two surveys moved in the same direction in only 2 of 4 months this year, and missed in April.
2. The NY Fed Index is not a good predictor of the Phil Fed Mfg Index, due Thursday.
a. The two moved in the same direction also in only 2 of 4 months this year.
NAHB Housing Market Index
1. This Index was 58 in April for the 4th month in a row. Consensus was for an uptick to 59.
2. The Index remained slightly below the 60-65 range seen from June 2015 through January 2016 (average, 61), but it was still higher than in any other month of this recovery.
Monday, May 16, 2016
Thursday, May 12, 2016
What Do the Soft Claims Data Mean? How About Tomorrow's Retail Sales?
Today's Initial Claims data were surprisingly soft and tomorrow's April Retail Sales data could be, as well. So far today, the data have had only a small impact, if any, on Treasuries and stocks. The markets may be taking them in stride because it is not clear whether they are signaling a continuation of sluggish economic growth.
Initial Claims
The 20k w/w jump in Initial Claims to 294k could be an important signal that sluggish economic growth is continuing in Q216 -- particularly since it is the 2nd large w/w increase in a row. But, the upturn could be a lagged result of the sluggish growth in Q116. Slower job growth in Q216 also could be a lagged result.
Retail Sales
Consensus looks for +0.7% m/m Total and +0.3% Ex Auto Retail Sales. The rebound in motor vehicle sales and higher-priced gasoline sales are probably largely behind the forecasts. But, the cold weather last month likely hurt sales of apparel and other seasonal goods -- which could help explain the weak profit warnings by Macy's and other retailers. Also, Retail Sales data tend to slow after several months of strength. Ex Auto/Ex Gasoline Sales were strong in February and March, and a slowdown in April would not derail a good-sized q/q gain in Consumer Spending. Indeed, the Atlanta Fed's GDP Model looks for 3.0% (q/q, saar) Real Consumption Growth in Q216 at this point.
Big Picture and the Fed
The upturn in Claims does not eliminate the possibility of a speedup in GDP Growth in Q2 -- especially since their improvement in Q116 did not signal the slowdown then. The latest Fed model projections for Q216 Real GDP are 2.2% (q/q, saar) by the Atlanta Fed and 0.8% by the NY Fed.
Nevertheless, a weaker labor market should stop Fed officials from saying that this market is a stand-out area of strength in an otherwise sluggish economy.
Initial Claims
The 20k w/w jump in Initial Claims to 294k could be an important signal that sluggish economic growth is continuing in Q216 -- particularly since it is the 2nd large w/w increase in a row. But, the upturn could be a lagged result of the sluggish growth in Q116. Slower job growth in Q216 also could be a lagged result.
Retail Sales
Consensus looks for +0.7% m/m Total and +0.3% Ex Auto Retail Sales. The rebound in motor vehicle sales and higher-priced gasoline sales are probably largely behind the forecasts. But, the cold weather last month likely hurt sales of apparel and other seasonal goods -- which could help explain the weak profit warnings by Macy's and other retailers. Also, Retail Sales data tend to slow after several months of strength. Ex Auto/Ex Gasoline Sales were strong in February and March, and a slowdown in April would not derail a good-sized q/q gain in Consumer Spending. Indeed, the Atlanta Fed's GDP Model looks for 3.0% (q/q, saar) Real Consumption Growth in Q216 at this point.
Big Picture and the Fed
The upturn in Claims does not eliminate the possibility of a speedup in GDP Growth in Q2 -- especially since their improvement in Q116 did not signal the slowdown then. The latest Fed model projections for Q216 Real GDP are 2.2% (q/q, saar) by the Atlanta Fed and 0.8% by the NY Fed.
Nevertheless, a weaker labor market should stop Fed officials from saying that this market is a stand-out area of strength in an otherwise sluggish economy.
Sunday, May 8, 2016
Stock Market Rally Ahead?
The stock market is likely to return to its highs by July, after it held support last week and as the US macro economic background improves into the summer. The combination of a stock market rally and improving US economic data should weigh on Treasuries, as well. An improving macro-economic background is predicted by the ECRI Leading Index -- ECRI stands for Economic Cycle Research Institute -- which has risen sharply since mid-February (see chart below).
The ECRI Leading Index does a good job predicting speedups/slowdowns in GDP Growth. The sharp improvement seen since mid-February points to a speedup in GDP Growth in the late Spring or early Summer. Note that because of quarterly averaging, the speedup in GDP Growth may show up more in Q316 GDP Growth than in Q2 GDP Growth. Note also that the improvement in the Index has slowed in the past few weeks. So, it is not clear at this point whether GDP Growth will top out in Q316.
a. Early projections by Fed models support the idea of a speedup in Q216 Real GDP. The Atlanta Fed's GDP Model's projects 1.7% (q/q, saar), while the NY Fed's model projects 0.8%. Both are stronger than the 0.5% growth of Q116.
The possibility that GDP Growth may top out in Q316 could persuade the Fed not to hike rates in September (aside from considerations regarding the November presidential election). But, evidence of stronger growth may very well get markets nervous that the Fed will hike at that meeting. So, the risk now is that a rally in the stock market will stall in July.
The ECRI Leading Index does a good job predicting speedups/slowdowns in GDP Growth. The sharp improvement seen since mid-February points to a speedup in GDP Growth in the late Spring or early Summer. Note that because of quarterly averaging, the speedup in GDP Growth may show up more in Q316 GDP Growth than in Q2 GDP Growth. Note also that the improvement in the Index has slowed in the past few weeks. So, it is not clear at this point whether GDP Growth will top out in Q316.
a. Early projections by Fed models support the idea of a speedup in Q216 Real GDP. The Atlanta Fed's GDP Model's projects 1.7% (q/q, saar), while the NY Fed's model projects 0.8%. Both are stronger than the 0.5% growth of Q116.
The possibility that GDP Growth may top out in Q316 could persuade the Fed not to hike rates in September (aside from considerations regarding the November presidential election). But, evidence of stronger growth may very well get markets nervous that the Fed will hike at that meeting. So, the risk now is that a rally in the stock market will stall in July.
ECRI Leading Index -- Chart begins July 2015, Last Peak Dec 2015, Latest Bottom Mid-Feb 2016, Latest Point is Week Ended April 29
Friday, May 6, 2016
April Employment Report Points to Modest Ecomomic Growth -- OK for Stocks and Treasuries
The April Employment Report points to a continuation of modest economic growth in Q216. While it does not take a June Fed Rate Hike off the table, it doesn't argue for one either. The Report supports Treasury yields staying low and stocks staying in a range. I would not be surprised if stocks recover their initial negative response by the end of the day or by early next week.
1. While Payrolls slowed to +160k after slightly downward-revised 200k+ gains in March and February, the pace is still solid enough to keep the Unemployment Rate on a downward trend (see point 3 below).
a. There is some reason to think Payrolls will speed up in May. Retail Jobs fell 3k m/m in April, an unwinding of the out-sized 39k jump in March. These jobs could speed up in May.
2. Total Hours Worked rose 0.4% m/m and are 1.5% (q/q, saar) above the Q116 average -- a solid start for Q216.
a. The uptick in the Nonfarm Workweek to 34.5 Hours contributed to the m/m increase in THW.
b. The Workweek is back to its trend level prior to February-March and a is a good predictor of further Payroll gains ahead.
3. The steady 5.0% Unemployment Rate hides a decline in the Rate in the second decimal place -- to 4.98% from 5.00% in March. This slight decline is consistent with job growth being above trend.
a. While Civilian Employment and Labor Force fell in April, the declines could reflect the quirks of the small sample -- which are cancelled out in the calculation of the Unemployment Rate.
b. The broader measure of labor market utilization -- U-6 -- fell to 9.7% from 9.8% in March.
c. Part-Timers for Economic Reasons also fell in April.
4. Th 0.3% m/m increase in Average Hourly Earnings is not troubling for the inflation rate. It probably was lifted in part by calendar and job composition factors.
a. The 2.5% y/y is within its recent range.
1. While Payrolls slowed to +160k after slightly downward-revised 200k+ gains in March and February, the pace is still solid enough to keep the Unemployment Rate on a downward trend (see point 3 below).
a. There is some reason to think Payrolls will speed up in May. Retail Jobs fell 3k m/m in April, an unwinding of the out-sized 39k jump in March. These jobs could speed up in May.
2. Total Hours Worked rose 0.4% m/m and are 1.5% (q/q, saar) above the Q116 average -- a solid start for Q216.
a. The uptick in the Nonfarm Workweek to 34.5 Hours contributed to the m/m increase in THW.
b. The Workweek is back to its trend level prior to February-March and a is a good predictor of further Payroll gains ahead.
3. The steady 5.0% Unemployment Rate hides a decline in the Rate in the second decimal place -- to 4.98% from 5.00% in March. This slight decline is consistent with job growth being above trend.
a. While Civilian Employment and Labor Force fell in April, the declines could reflect the quirks of the small sample -- which are cancelled out in the calculation of the Unemployment Rate.
b. The broader measure of labor market utilization -- U-6 -- fell to 9.7% from 9.8% in March.
c. Part-Timers for Economic Reasons also fell in April.
4. Th 0.3% m/m increase in Average Hourly Earnings is not troubling for the inflation rate. It probably was lifted in part by calendar and job composition factors.
a. The 2.5% y/y is within its recent range.
Wednesday, May 4, 2016
Lowering Estimate of April Payrolls After ADP, But Q1 GDP Likely to be Revised Up
I'm lowering my estimate of April Payrolls to +150k m/m after the +156k ADP Estimate.
a. My earlier estimate was an already below-consensus +175k (consensus +200k).
The low ADP Estimate cannot be attributed to technical reasons but likely reflected a slowing in the ADP sample, itself.
I still think that April Payrolls will be held down by /1/ a lagged response to the Q116 GDP slowdown and /2/ the absence of unusual bounces in some components in March.
The weak productivity seen in Q415 and Q116 underscores that recent job growth has been too high relative to output growth.
That said, it looks like Q116 GDP should be revised up to some extent from +0.5% (q/q, saar) as a result of March Construction Spending (reported yesterday) and March Trade Deficit (reported today).
a. I have not had a chance to do the calculations, but an upward revision should not be enough to change the story of slow GDP growth continuing in Q116.
a. My earlier estimate was an already below-consensus +175k (consensus +200k).
The low ADP Estimate cannot be attributed to technical reasons but likely reflected a slowing in the ADP sample, itself.
I still think that April Payrolls will be held down by /1/ a lagged response to the Q116 GDP slowdown and /2/ the absence of unusual bounces in some components in March.
The weak productivity seen in Q415 and Q116 underscores that recent job growth has been too high relative to output growth.
That said, it looks like Q116 GDP should be revised up to some extent from +0.5% (q/q, saar) as a result of March Construction Spending (reported yesterday) and March Trade Deficit (reported today).
a. I have not had a chance to do the calculations, but an upward revision should not be enough to change the story of slow GDP growth continuing in Q116.
Tuesday, May 3, 2016
Markets Catching Up to Modest Growth Scenario, But...
Since Thursday, the markets are catching up to the evidence of modest economic growth that I have been highlighting. This catch-up may continue at least through Friday's April Employment Report, which I expect to be weaker than consensus. At this point, however, I believe there are reasons to expect the stock market to renew its rally in June -- and this expectation could help the markets stabilize in the second half of May.
1. Some key US economic data should improve in May. For example, seasonal factors add to the m/m change in the May Mfg ISM relative to last year's seasonals (+0.2 pt versus -0.7 pt in April). May Mfg ISM is due June 1.
a. Note that April's print of 50.8 supports the idea of a speedup in Q2 GDP Growth -- albeit modest -- from the anemic 0.5% in Q116, as the April level is above the 49.5 Q116 average.
2. The Fed is likely to implicitly ease by 25 BPs at its June 14-15 FOMC Meeting.
a. This result would follow if (a) the Fed does not hike the funds rate and (b) signals only one hike this year in its forward guidance -- which would be down from the two hikes signaled at the March FOMC Meeting.
b. I don't believe Street Economists have caught on to looking at Fed policy this way (but the markets have). The Street Economists would consider this result being no change in Fed monetary policy rather than an easing.
3. UK presumably votes "no" regarding Brexit, scheduled for June 23.
4. Q216 Corporate Earnings -- reported in July -- are likely to improve relative to Q116: /1/ dollar is weaker, /2/ oil prices are higher, and /3/ Real GDP Growth is stronger. However, Real GDP Growth sped up by more in Q215 than is expected for Q216, so the y/y comparison should not be helped by the last factor.
1. Some key US economic data should improve in May. For example, seasonal factors add to the m/m change in the May Mfg ISM relative to last year's seasonals (+0.2 pt versus -0.7 pt in April). May Mfg ISM is due June 1.
a. Note that April's print of 50.8 supports the idea of a speedup in Q2 GDP Growth -- albeit modest -- from the anemic 0.5% in Q116, as the April level is above the 49.5 Q116 average.
2. The Fed is likely to implicitly ease by 25 BPs at its June 14-15 FOMC Meeting.
a. This result would follow if (a) the Fed does not hike the funds rate and (b) signals only one hike this year in its forward guidance -- which would be down from the two hikes signaled at the March FOMC Meeting.
b. I don't believe Street Economists have caught on to looking at Fed policy this way (but the markets have). The Street Economists would consider this result being no change in Fed monetary policy rather than an easing.
3. UK presumably votes "no" regarding Brexit, scheduled for June 23.
4. Q216 Corporate Earnings -- reported in July -- are likely to improve relative to Q116: /1/ dollar is weaker, /2/ oil prices are higher, and /3/ Real GDP Growth is stronger. However, Real GDP Growth sped up by more in Q215 than is expected for Q216, so the y/y comparison should not be helped by the last factor.
Sunday, May 1, 2016
Downside Risks to Next Week's Key US Economic Data
I can see downside risks to this coming week's key US economic data for April. They should be a positive for Treasuries, but a negative for stocks and the dollar.
My Estimate Consensus March Print Actual
April Mfg ISM 50.0 51.4 51.8 50.8
April Non-Mfg ISM 54.0 54.7 54.5 55.7
April Payrolls 175k 200k 215k 160k
Evidence:
Mfg ISM
1. April Mfg ISM Seasonal Factors subtract 0.7 point more from the m/m change than they did in April 2015.
a. Seasonal Factors subtracted less from the Mfg ISM's March change in 2016 than in 2015, so contributed to the m/m increase in the March March ISM in last month's report.
2. Phil Fed Mfg Index fell in April, correctly predicting the direction of Mfg ISM in each of the past two months.
a. Market Mfg PMI also fell in April, but it does not track the direction of Mfg ISM well.
3. The New Orders Component jumped to a very high level in March and risks coming off in April.
Non-Mfg ISM
1. April Non-Mfg ISM Seasonal Factors also subtract 0.7 pt more from the m/m change than they did in April 2015.
a. Seasonal Factors subtracted less from the Non-Mfg ISM's March change in 2016 than in 2015, so contributed to the m/m increase in the March March Non-ISM in last month's report.
Payrolls
1. Some components of March Payrolls looked too strong relative to trend and underlying activity -- in particular, retail and construction jobs. So, the risk is that they post smaller gains in April.
2. Claims data point to a speedup in Payrolls, but they are not a reliable predictor.
My Estimate Consensus March Print Actual
April Mfg ISM 50.0 51.4 51.8 50.8
April Non-Mfg ISM 54.0 54.7 54.5 55.7
April Payrolls 175k 200k 215k 160k
Evidence:
Mfg ISM
1. April Mfg ISM Seasonal Factors subtract 0.7 point more from the m/m change than they did in April 2015.
a. Seasonal Factors subtracted less from the Mfg ISM's March change in 2016 than in 2015, so contributed to the m/m increase in the March March ISM in last month's report.
2. Phil Fed Mfg Index fell in April, correctly predicting the direction of Mfg ISM in each of the past two months.
a. Market Mfg PMI also fell in April, but it does not track the direction of Mfg ISM well.
3. The New Orders Component jumped to a very high level in March and risks coming off in April.
Non-Mfg ISM
1. April Non-Mfg ISM Seasonal Factors also subtract 0.7 pt more from the m/m change than they did in April 2015.
a. Seasonal Factors subtracted less from the Non-Mfg ISM's March change in 2016 than in 2015, so contributed to the m/m increase in the March March Non-ISM in last month's report.
Payrolls
1. Some components of March Payrolls looked too strong relative to trend and underlying activity -- in particular, retail and construction jobs. So, the risk is that they post smaller gains in April.
2. Claims data point to a speedup in Payrolls, but they are not a reliable predictor.
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