Economic Reports Did Not Provide the Answers.
Thursday, July 31, 9:25 a.m.
The last ten days have seen some of the most important economic reports in quite some time. They came at a time when investors, retail and institutional, are anxious for answers.
Was the winter slowdown only due to the weather, or was it something systemic and ongoing? With interest rates already near zero, the Fed’s balance sheet already at $4 trillion and growing from QE stimulus purchases, is the Fed capable of coming to the rescue again if the economy is faltering? In the other direction, with the unemployment rate well below its target and inflation beginning to rise, is the Fed behind the curve on the need to begin raising interest rates? Will the economy rebound enough to postpone an overdue market correction?
It was hoped the reports of the last ten days would provide the answers.
Instead they provided something for both bulls and bears, and more questions than answers.
From the important housing sector:
Existing Home Sales rose a tepid 2.6% in June. That was higher than last October, and fractionally better than the consensus forecast, but still 2.3% lower than the pace a year ago.
New home starts fell 6.5% in May, and permits for futures starts fell 6.4%, not boding well for June and July new home sales. And sure enough, last Thursday it was reported that new home sales plunged 8.1% in June to an annualized rate of just 406,000. Rather than a rebound, that was an even slower pace than three months ago. It missed the consensus forecast for 475,000 by a wide margin, and has new home sales not rebounding, but instead 11.5% lower than June of last year. The number of unsold homes increased by 6.5% in June from a year ago.
This week it was reported that Pending Home Sales fell 1.1% in June. The index is 7.3% below a year ago.
Other areas:
The Fed’s National Business Index (CFNBI), a composite of 85 economic indicators, declined to 0.12 in June from 0.16 in May. The more important three-month moving average declined from 0.33 in May to 0.18 in June.
But the Richmond Fed Mfg Index improved from a reading of 4 in June to 7 in July. The Dallas Fed Mfg Index improved from 15.5 in June to 19.1 in July, better than the consensus forecast. And Durable Goods Orders were up 0.7% in June, after declining 0.1% in May. The Markit PMI non-services Index remained unchanged in July at 61.
The Conference Board’s Consumer Confidence Index improved to 90.9 in July from 86.4 in June, better than the consensus forecast of a decline to 85.0. But the Thomson Reuters/University of Michigan Consumer Sentiment Index fell to 81.3 in July from 82.5 in June.
There was a big positive surprise in the report that GDP grew at a 4.0% annualized rate in the 2nd quarter, much better than the consensus forecast of 3.0%. And GDP growth in the 1st Quarter was revised up to negative –2.1% from the previous report of negative –2.9%.
Yet, analysts pointed out that inventory building accounted for 1.6% of the 4.0% GDP growth in the 2nd quarter, which will put a drag on the 3rd quarter as the inventory is worked off, and will result in 3rd quarter forecasts being revised down.
On Inflation:
It was reported this morning that the Employment Cost Index rose in the 2nd quarter at its fastest pace since 2008, jumping to 0.7% after rising 0.3% in the 1st quarter.
Meanwhile, the Fed’s favored method of measuring inflation is the PCE inflation indicator. And it was reported yesterday morning that it spiked up to 2.3% in the 2nd quarter. That raised concerns the Fed might have to raise interest rates to ward off inflation sooner than thought.
But in its statement after its FOMC meeting yesterday afternoon, the Fed indicated it is not concerned, saying that, “Longer-term inflation expectations have remained stable."
On the employment picture:
New weekly unemployment claims have been declining sharply, reaching an 8-year low of 284,000 two weeks ago, (although as reported this morning, rising by 23,000 last week, to 308,000).
But the ADP monthly employment report this week was that only 218,000 new jobs were created in July, down from 281,000 in June, and missing the consensus forecast of 235,000.
The reports answered few if any of the important questions, and added at least one, regarding potential inflation.
And the reports certainly did nothing to change the conditions of high market overvaluations (40% according to the Shiller CAPE10 P/E), high levels of investor bullishness and complacency; record margin debt; heavy insider and institutional selling; signs of a potentially slowing economy led by the housing industry, the Fed tapering back stimulus, toppy European markets, unfavorable seasonality, and the unusually long time without a normal 10% to 20% market correction.
Has a Correction Begun Already?
My forecast since last winter has been for a significant correction in the the market’s unfavorable summer season this year, a decline of 15% to 20% for the Dow and S&P 500, and 20% to 25% for the Nasdaq and Russell 2000, to an important low in the October/November time-frame.
Our intermediate-term technical indicators came off their buy signal in February, but only to neutral, and have remained so since, even as the surrounding economic, valuation and investor sentiment conditions worsened.
And the market’s resilience has been impressive.
But there have been some signs of the market getting tired again, and our short-term indicators have been on a sell signal, calling for a short-term pullback, which seems to be underway.
But could it turn out to be something worse?
Just a 10% decline would wipe out 9 months of the market’s gain, taking it back to last October. A 20% decline is overdue and would wipe out all of this year’s and almost all of last year’s gains.
The economic reports did not provide answers to the important questions.
We will, as always, depend on our intermediate-term technical indicators to tell if this is just another short-term pullback or the beginning of something worse.
To read my weekend newspaper column click here: China’s Market Finally Looks Like a Buy
Subscribers to Street Smart Report:
In addition to the charts and signals in the ‘premium content’ area of this blog, there is an in-depth Markets Update (stocks, gold, bonds) from yesterday in your secure area of the Street Smart Report website.
Yesterday in the U.S. Market.
A mixed day yesterday, with some intraday volatility in reaction to the economic reports and Fed’s FOMC meeting, but nothing that lasted to the close. The Dow was up as much as 80 points, and down as much as 95 points, but closed down only 31 points. Volume was a bit above average at 0.67 billion shares traded.
The Dow closed down 31 points, or 0.2%. The S&P 500 closed unchanged. The NYSE Composite closed down 0.1%. The Nasdaq closed up 0.4%. The Nasdaq 100 closed up 0.4%. The Russell 2000 closed up 0.4%. The DJ Transportation Avg. closed up 0.7%. The DJ Utilities Avg closed down 1.7%.
Gold closed down $4 an ounce at 1,295.
The U.S. dollar etf UUP closed up 0.2%.
The 20-yr bond etf TLT closed down 1.4%.
European Markets closed down fairly sharply yesterday.
The London FTSE closed down 0.5%. The German DAX closed down 0.6%. France’s CAC closed down 1.2%. Belgium closed down 1.0%. Denmark closed up 0.1%. Finland closed down 0.5%. Greece closed down 0.1%. Ireland closed down 0.7%. Italy closed down 0.9%. Netherlands closed up 0.2%. Norway closed down 0.6%. Portugal plunged 3.3%. Spain closed up 0.3%. Switzerland closed down 0.4%.
Asian Markets closed mixed last night.
The Asia Dow closed down 0.7%. Among individual countries:
Australia closed up 0.1%. China closed up 0.9%. Hong Kong closed up 0.1%. India closed down 0.7%. Indonesia closed down 0.2%. Japan closed down 0.2%. Malaysia closed down 0.3%. New Zealand closed up 0.2%. South Korea closed down 0.3%. Singapore closed up 0.6%. Taiwan closed down 1.4%. Thailand closed down 1.1%.
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Markets This Morning:
European markets are down sharply again this morning.
The Europe Dow is down 1.0%.
The London FTSE is down 0.2%. The German DAX is down 1.3%. France’s CAC is down 1.1%. Belgium is down 0.6%. Denmark is down 1.0%. Finland is down 0.7%. Greece is down 2.3%. Ireland is down 1.3%. Italy is down 1.5%. Netherlands is down 0.7%. Norway is down 0.6%. Portugal is plunging 3.3%. Spain is down 2.0%. Switzerland is down 0.8%.
This Morning in the U.S. Market:
Oil is down $.76 a barrel, at $99.49.
Gold is down $8 an ounce at $1,287.
This week’s Economic Reports:
This week will be see a number of important economic reports, including the the ADP Jobs Report, the first look at 2nd quarter GDP growth, the ISM Mfg Index, Construction Spending, and The Big One!, the Labor Department’s Monthly Employment Report, etc. To see the full list and times click here, and look at the left side of the page it takes you to.
Yesterday’s reports were that the Markit PMI non-services Index remained unchanged in July at 61. Pending Home Sales declined 1.1% in June, the first decline in 4 months. The index is 7.3% below a year ago. And the Dallas Fed Mfg Index improved from 15.5 in June to 19.1 in July, better than the consensus forecast.
This morning, the Case-Shiller Home Price Index showed home prices rose 1.1% in May (negative for home purchase affordability?). The Conference Board’s Consumer Confidence Index improved to 90.9 in July from 86.4 in June, better than the consensus forecast of a decline to 85.0.
Yesterday, the ADP Jobs Report showed only 218,000 new jobs were created in July, down from 281,000 in June, and missing the consensus forecast of 235,000. But the Commerce Department reported that 2nd Quarter GDP grew at a 4.0% annual rate, much better than the consensus forecast of 3.2%. And GDP growth in the 1st Quarter was revised up to –2.1% from the previous report of – 2.9%. Analysts are pointing out that inventory building accounted for 1.6% of the 4.0% GDP growth in the 2nd quarter. And the PCE inflation indicator spiked up to 2.3% in the 2nd quarter., The PCE is the Fed’s choice over CPI as a measurement of inflation. The Fed’s statement after its FOMC meeting contained no surprises.
This morning’s report was that new weekly unemployment claims were up by 23,000 to 302,000, one week after reaching a 14 year low. The four-week m.a. fell by 3,500 to 297,250. And it was reported that the Employment Cost Index was up 0.7% in the 2nd quarter to the fastest pace since 2008.
Still to come is the Chicago PMI, which will be released at 9:45 a.m.
The pre-open indicators have been quite negative, perhaps influenced by the sharp plunges again in European markets.
Our Pre-open Indicators:
Our pre-open indicators are pointing to the Dow being down 125 points or so at the open.
I’ll be back with the next post on Saturday morning, as usual later than on the week-days, probably around 12 noon.
To read my weekend newspaper column click here: China’s Market Finally Looks Like a Buy
Subscribers to Street Smart Report:
In addition to the charts and signals in the ‘premium content’ area of this blog, there is an in-depth Markets Update (stocks, gold, bonds) from yesterday in your secure area of the Street Smart Report website.
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If you haven’t done so yet, check out our new bull market/bear market indicator (BBMI) by clicking here: Market Timing Strategy
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