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Chart of the Day – Continued Strength in Economic Data

This morning, the Institute for Supply Management reported that The ISM Non-Manufacturing Index, which includes prices paid for all purchases including import purchases and purchases of food and energy excluding crude oil, showed the strongest print since August 2005.

ISM Highest Since 2005

Why Do investors care? Here’s the explanation courtesy of Econoday:

Why Investors Care
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM non-manufacturing survey’s composite index, investors will know what the economic backdrop is for the various markets. The non-manufacturing composite index has four equally weighted components: business activity, new orders, employment, and supplier deliveries. The ISM did not begin publishing the composite index until the release for January 2008. Prior to 2008, markets focused on the business activity index. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly-and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this relatively new report goes back to 1998.

Frequency
Monthly.

Source
Institute for Supply Management.

Availability
The third business day of the month.

Coverage
Data are for the previous month. Data for June are released in July.

Revisions
No.
Definition
The non-manufacturing ISM surveys nearly 400 firms from 60 sectors across the United States, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade.
Posted by John Adams on February 3, 2011 under Economics,Educational,Fed Watching
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Payroll forecast That Will Move Markets

Tomorrow is the all important jobs/payroll number at 8:30am EST. With all the bullish economic numbers of late, this one will certainly have all eyes on it as employment is the final missing link confirming an end to the great 2007/2008 recession. The Bloomberg consensus number is +150k jobs. Also, the PDF shows where all the Wall Street economists are predicting. What is the call of your favorite economist?

Employment number
View more documents from bondsquawk.
Posted by BondSquawk on January 6, 2011 under Fed Watching
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Housing Starts “Disappointing” as Price Pressures Remain Subdued, Industrial Production a Mystery

By Rom Badilla, CFA – Bondsquawk.com

August 17, 2010

Housing Starts for July increased by 1.7 percent in July to an annualized 546k from a prior period level of 537k, which was revised downward by 12k from the initial report.  The increase failed to meet expectations as economists forecasted a higher month over month increase of 0.2 percent.  The Goldman Sachs economics team led by Jan Hatzius stated that the report was “disappointing” for several reasons.

In their report, they stated on their website that “First, single-family starts fell 4.2% on the month; this matters because single-family units are much higher in value-added per unit. Second, data for June were revised down, though mostly in multifamily units. Third, permits were down; this drop was concentrated in multifamily units, where permits have most of their (relatively weak) predictive power for starts due to the longer leads in such construction.”

In further signs that the current housing mess will continue Building Permits, which is a gauge of future construction, fell 3.1 percent in July after a final prior period increase of 1.6 percent that was revised downward half a percent from initial readings.  Economists were expecting a more palatable decline of only 0.5 percent.

The Producer Price Index rebounded by increasing 0.2 percent in July after a prior period decline of 0.5 percent. The index aka “headline” number was in-line with market expectations and economists. However, PPI after stripping out the food and energy components aka “Core PPI” surprised to the upside by increasing 0.3 percent versus consensus surveys of 0.1 percent. The uptick in the July Core PPI number comes after a 0.1 percent increase in the prior month.

After looking at the individual components, the easing price pressure theme is still intact and inflation expectations should remain subdued for the most part. The latest figures are a result of a 1.5 percent increase in light truck prices, which declined 1.0 percent in June followed by higher prices in both prescriptions and passenger cars, which increased 0.7 and 0.3 percent, respectively. Declines in apparel of 0.5 percent and computer equipment prices, which fell 0.3 percent partially offset the some of the increases.  Finally, Intermediary Prices fell for the second consecutive month.  In July, Intermediary Prices ex Food and Energy dropped 0.4 percent following a similar decline in the prior period.

Industrial Production for July increased and surprised market expectations.  The Federal Reserve released data that Industrial Production increased by 1.0 percent, followed by downward revised prior period decline of 0.1 percent.  Economists were expecting a gain of only 0.5 percent.  The jump in Industrial Production is a result of a rather large increase in motor vehicle parts, which comprises 3.5 percent of the total.  For July, motor vehicle parts spiked 9.9 percent after falling 2.5 percent in the prior period.

This unexpected jump is a “head-scratcher” since it is inconsistent with other economic data releases, which suggests waning manufacturing activity.  Goldman Sachs in response to the outlier stated, “The key question in this island of positive surprise is where the goods are going. The survey data have been reasonably consistent in saying that orders are flagging and that inventories have been building. If that’s the pattern, then gains in production will not last. If not, then the surveys will have led us astray.”

Lastly, Capacity Utilization, which measures total output as a percent of in-place capacity, was mostly in-line with surveys.  The Capacity Utilization Index, which is released by the Federal Reserve, now stands at 74.8 percent versus surveys of 74.6 percent and after a prior period reading of 74.1 percent.  While manufacturers are becoming more efficient as evident by this latest number, utilization continues to remain far below rates prior to the recession as the Capacity Utilization Index averaged 80.7 percent in 2006 and 2007.

Posted by Rom on August 17, 2010 under Bond Trading,Fed Watching

NY Manufacturing Expands Less Than Expected, Price Pressures Non-Existent

By Rom Badilla, CFA – Bondsquawk.com

August 16, 2010

Manufacturing activity in the New York region expanded less than market forecasts despite rebounding slightly from the previous month.  Today, the New York Federal Reserve Bank released its Empire Manufacturing Index, which is a regional conditions gauge and reflects current and potentially future business activity.  The Index increased to an index reading of 7.10 in August from a prior period reading of 5.08, which was a dip from earlier this year when the index reached a 2010 high of 31.86 in April.  An Empire Manufacturing Index reading above zero represents economic expansion.  Despite the slight rebound, today’s figure disappointed market participants as economists expected the index to come in at 8.0.  The Index along with the Philly Fed survey, which is due for release on Thursday, is a leading indicator of the national manufacturing gauge, released by the Institute for Supply Management.

Looking beyond the headlines, the components reveal further deterioration of business activity.  The New Orders for August fell to a contractionary negative reading of 2.71 from a positive level of 10.13 in the July.   Inventories declined from 6.35 to 2.86 while Shipments collapsed to a negative reading of 11.50 from a positive 6.31 in July.  On a more half-full side of things, the Number of Employees component increased from 7.94 to 14.29 in August signaling slightly better hiring conditions.

The Prices Paid component, which provides insight on inflation expectations (see chart) and a component that we have been monitoring in recent months, continues to decline signaling easing price pressures.  Prices Paid fell more than five points from July’s reading to 20.0, which suggests that input prices continue to show signs of slowing.  This marks the third straight decline after peaking in May when the Prices Paid index reached a strong reading of 44.74.  Prices Received component, which reflects lower selling prices, mires in negative territory at 2.86 from a contractionary reading of 1.59 in July.

NY and Philly Fed Prices Paid Indices & Inflation Expectations - Past 5 Years

Finally, the National Association of Home Builders survey index declined suggesting continuing pressures on the depressed housing market.  The NAHB market index, which is a survey that includes responses by over four hundred homebuilders, fell to a reading of 13 in August from 14 set in the previous month.  Economists failed to forecast today’s drop, which is the lowest reading since March 2009, as Bloomberg consensus surveys expected a reading of 15. Behind the numbers, the components for current and future sales dropped.  The Present Single Family Sales Index declined by a point from the previous month to an August reading of 14.  Similarly, the Future Sales index fell three points to a level of 18 in August.   Comparatively, the Future Sales Index reached a recent high of 27 in May and the six-month average stands at 23.

Posted by Rom on August 16, 2010 under Bond Trading,Fed Watching
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Initial Jobless Claims Jump, Disappoint Forecasts

By Rom Badilla, CFA – Bondsquawk.com

August 12, 2010

The Department of Labor released data suggesting that people filing for first time unemployment benefits spiked, providing further evidence that the economy is stalling due to anemic job growth. Initial Jobless Claims increased to 484k people for the week ending August 7. In addition, Initial Jobless Claims for the prior week was revised slightly upward by three thousand to 482k. This week’s jump disappointed the market since it came in four percent above forecasts as economists expected a claims number of 465k. This drives the four-week moving average, which is universally used to “smooth out” the weekly volatility and to provide a discernable trend, to a higher level of 473.5k.

Weekly Initial Jobless Claims & 4-week Moving Average

This uptick is of concern for the U.S. economy. The the four week moving average has been hovering between 450k and 500k since last November, which is more in-line with further job losses based off of previous cycles.  A moving average of below 400k is typically more in-line with a recovery.

Continuing Claims for the week ending July 31 dropped to 4452k from a revised weekly reading of 4570k. The decline was better than forecasts as economists expected Continuing Claims to come in at 4535k. However, keep in mind that the drop does not necessarily mean a pickup in hiring as many of the unemployed exhaust their federal benefits as they hit the limit of 99 weeks under current legislation.

As far as reaction to the disappointing claims figures, bond yield changes are rather subdued which should not be a surprise given the huge decline in yields. The 2-Year continues to signal ’economic slodown’ and is trading at 0.53 percent while the 10-Year is hovering around 2.74 percent, both higher by 2-3 basis points from yesterday’s close.

Posted by Rom on August 12, 2010 under Bond Chatter,Fed Watching
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Federal Reserve to Reinvest Maturing Securities Back into Treasuries

August 10, 2010

FOMC Meeting Highlights

  • Pace of recovery in output and employment changed from “improving slightly” to “has slowed in recent months”
  • Household spending is increasing “gradually” but remains “constrained”
  • Removed concern on financial conditions due to developments abroad
  • Pace of economic recovery changed from “to be moderate for a time” to “more modest in the near term than had been anticipated”
  • Measures of underlying inflation have “trended lower”
  • The Fed plans to keep its holdings “constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.”
  • Kansas City Fed’s Thomas Hoenig continues to be the lone dissenter as he “did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.”

Full Text from Federal Reserve

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.

Posted by Rom on August 10, 2010 under Fed Watching
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Weak Jobs Report Points to Economic Slowdown, Bonds Rally

By Rom Badilla, CFA – Bondsquawk.com

August 6, 2010

The U.S. economy may be losing steam on its road toward a recovery due to a drop in government workers and anemic increases in headcount in the private sector.  According to the Bureau of Labor Statistics, the Non-farm Payrolls index for June decreased by 131,000 people.  The decrease was well below surveys as economists were expecting a decline of just 65,000.  To add further insult to injury, the previous month’s figure was revised downward from an initial reported decrease of 125,000 to a staggering drop of 221,000.  In the private sector, payrolls failed to meet expectations as latest figures show an increase of only 71,000 jobs versus economists’ surveys of 90,000.  In similar fashion to the total number, the June numbers were revised downward by 52,000 to a final increase of 31,000. 

In the lone bright spot from today’s data releases, the manufacturing sector added 36,000 people to the workforce in July versus surveys of 13,000.  The prior period was revised upward slightly to an addition of 13,000 as the initial report for June stood at an increase of only 9,000.  While this sector added bodies to the workforce in July, the problem is manufacturing activity is pointing south.  Based off of recent data such as the drop in durable goods orders and the latest ISM Manufacturing surveys, activity going forward is slowing as inventory replenishment and federal stimulus measures are about to wrap up.

Despite further job losses, the official Unemployment Rate remained the same in July, which is factored by a decline in the labor force as discouraged workers increased.  The Unemployment Rate came in at 9.5 percent in July as economists were expecting a rate of 9.6 percent.  The U-6 measure, which includes workers who are discouraged as well as those who resort to working part-time, failed to improve.  The U-6 measure stands at 16.5 percent in July, which has improved by only 1.1 percent since the high of 17.4 percent set in October 2009.

Bonds are rallying again because of the anemic jobs report.  The 2-Year, acting true to its form as a gauge on the health of the economy, is past previous resistance levels and is now trading at 0.51 percent, a decline of 2 basis points from Thursday’s close.  In addition, the 10-Year is now trading well below its most recent lows of 2.88 percent set on July 21st, and has dropped 8 basis points to 2.82 percent.   

Anyone who thought that the market was amidst a bond bubble and that yields could not go any lower before today must be kicking themselves at this point.  As we have talked about for many months, the U.S. is headed for an economic slowdown with the potential for another double dip as people deal with a “balance sheet recession” where the focus is on repair by “hunkering down” and less so of spending.  Due to these factors, disinflation/deflation will be the predominate theme which in turn should lead to lower bond yields and better returns for fixed income investors.

Posted by Rom on August 6, 2010 under Bond Chatter,Fed Watching

Future of the Fed

August 4, 2010

Assessing the economic slowdown, with Frederic Mishkin, Columbia University professor and former Federal Reserve Board governor and Mark Olson, former Federal Reserve Board governor.


(Source: CNBC)

Posted by Rom on August 4, 2010 under Fed Watching

Consumer Spending Halts, Income Stagnant, and Pending Home Sales Drop

By Rom Badilla, CFA – Bondsquawk.com

August 3, 2010

Today’s economic data releases suggest that the U.S. recovery may be slowing as we head into the second half of 2010.  The Commerce Department released figures that both Personal Income and Personal Spending failed to grow in June, following a tenth of a percent downward revision in the May readings to final levels of 0.3 and 0.1 percent, respectively.  June’s flat readings disappointed economists as surveys called for an increase of 0.2 percent in Personal Income and a move higher of 0.1 percent in Personal Spending.

BNP Paribas added the following look behind the headline numbers in a morning email to clients:

Personal income did not change for the first time since September 2009, consistent with the aggregate income data from the June employment report, which were particularly weak dropping by 0.5% m/m. Annual benchmark revisions were released with this report. Personal spending trajectory was revised notably down, which resulted in a much higher savings rate. Savings rate in June was 6.4% up from an upwardly revised 6.3% in May (was previously estimated at 4.0%). Core PCE was flat on a monthly basis, implying a y/y rate of change of 1.4% down from 1.5% m/m in May.

Factory Orders unexpectedly dropped in June giving more reason of a slowdown in manufacturing activity, according to the U.S. Department of Commerce.  Factory Orders fell by 1.2 percent versus surveys of a decline of 0.5 percent.  To add insult to injury to the disappointment of missing expectations, the prior period’s reading was revised downward from an initial release of -1.4 percent to a final -1.8 percent.

Pending Home Sales dropped 2.6 percent on a month over month basis in June as government tax incentives expired for prospective home buyers.  Economists were expecting a bounce of 4.0 percent after May’s massive decline of nearly 30 percent.

Pending Home Sales gives insight into forthcoming Existing and New Home Purchases which does not bode well for the millions of homes sitting idle on the market.  BNP Paribas added that “Pending home sales are recorded when a sale contract is first signed. Existing home sales are recorded when a mortgage is closed, implying there is usually a one to two months lag between the series. Therefore, pending home sales freefall points to further weakness existing home sales in July. Housing demand outlook for this year remains very uncertain.”

The Bureau of Economic Analysis released its Personal Consumption Expenditures Price Index (PCE) which is another gauge of inflation and price pressures.  The PCE Core index was flat for June as surveys called for a month over month increase of 0.1 percent.  In addition, PCE Core for May was revised downward by a tenth of a percent to a final reading of an increase of 0.1 percent.  Given this data, inflation expectations should remain subdued in the coming months.

Posted by Rom on August 3, 2010 under Bond Chatter,Fed Watching

More Quantitative Easing on the Way?

August 3, 2010

The Federal Reserve purchased tremendous amounts of fixed income securities such as Treasuries, Agencies, and Mortgage Backed Securities during the height of the financial crisis and recession in order to pump money back into the system and to promote growth.  Now with the Fed’s balance sheet at nearly three times its original size from before the onset of the crisis, the question becomes what to do with it.  As economic data releases reveal that the recovery may be stalling, the Federal Reserve may consider further action to stimulate growth by maintaining or adding more to their balance sheet when they meet next week, according to the Wall Street Journal article, “Fed Mulls Sumbolic Shift.”

Federal Reserve officials will consider a modest but symbolically important change in the management of their massive securities portfolio when they meet next week to ponder an economy that seems to be losing momentum.

The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook. If the Fed’s forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy.

Moving to stop the Fed’s portfolio from shrinking would prevent monetary policy from slightly tightening in the face of a weakening recovery.

The central bank’s $2.3 trillion portfolio has nearly tripled in size since 2007.

Buying new bonds with this stream of cash from maturing bonds—projected at about $200 billion by 2011—would show the public and markets that the Fed is seeking ways to support economic growth. It could also be a compromise that rival factions at the Fed support, as officials differ about whether and how to address a subpar recovery.

Whether the Fed makes any move next week depends in large part on economic data, particularly the government snapshot of the jobs market due Friday. Since Fed officials last met in June, data on consumer confidence and spending have softened and job data haven’t improved. But overall financial conditions have improved somewhat, with a rebounding stock market.

Officials in the Fed’s anti-inflation camp aren’t convinced the economy is slowing significantly and are wary of taking new actions. Others are eager to consider new steps to address recent signs of a slowdown and persistent high unemployment.

Fed officials aren’t yet prepared to take the larger step of resuming large-scale purchases of mortgage-backed securities or U.S. Treasurys. But they are holding open that option if the economy deteriorates. Private forecasters generally expect real GDP to grow by an annual rate of about 2¾% in the second half of 2010. If the picture deteriorates and they forecast growth falling below 2%, the Fed would be more likely to act.

Read the Full Article

Posted by Rom on under Bond Chatter,Fed Watching
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