Initial Jobless Claims totaled 464k, 19k above expectations and up from a revised 427k last week. The distortion of the seasonal auto shutdowns that didn’t happen at GM combined with the July 4th holiday has made the initial claims portion of the data too cloudy to analyze week to week and we thus should average the prior couple of weeks. The 4 week average is 456k, just shy of the lowest since late May but still remains very elevated for an economy that is this far into a recovery. Continuing Claims fell a sharp 223k but comes after rising 276k in the week prior. Extended Benefits fell a net 368k after a fall of 278k in the week prior and 345k the week before. This sharp drop has been more due to people falling off the rolls because of the expiration of benefits. With the extension likely to be reinstated up to 99 weeks, this trend should reverse as the labor market still remains lackluster.
Just when one thought the FOMC couldn’t get more dovish, they get more dovish, specifically on inflation. They toned down the outlook by saying the “economic recovery is proceeding” vs “economic activity has continued to strengthen” in Apr. They referred to the improvement in the labor market as gradual. They took out “housing starts have edged up” out of the statement as they should and they also implicitly referred to Europe by saying “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.” On inflation, they referred to the drop in energy and other commodities as helping to lower the trend of inflation. Of course in Apr when copper was at $3.65 and oil was at $90, the FOMC didn’t mention the upside risks to inflation, thus the very dovish commentary. Rates will stay “exceptionally low” for a very, very, very, very long time.
March Pending Home Sales, which reflect the desire to take advantage of the April 30th expiration of the home buying tax credit, rose 5.3%, about in line with expectations of a rise of 5%. Gains were seen most in the South followed by the West and Midwest. The Northeast saw a drop of 3.3%. The y/o/y gain is now 23.5% but all changes when we see the May data as even the NAR acknowledges that “we expect measurably lower sales” with no tax credit. As the NAR also says, the market will need an economy that can “add jobs at a respectable pace” in order to see home sales become self sustaining in the 2nd half of ’10 and into ’11. One positive for the market noted in the NAR release is the improvement in the availability of jumbo and 2nd home loans as bank balance sheets slowly improve.
The ISM manufacturing survey was about in line with expectations at a solid 60.4 vs the estimate of 60 and is up from 59.6 in March. It’s the first time above 60 since June ’04 but only measures the direction of change, not the degree. New Orders rose 4.2 pts to 65.7 but Backlogs fell .5 pt to 57.5. Production, which follows new orders, rose 5.8 pts to 66.9. Inventories fell back below 50 at 49.4 but after the 8 pt spike to 55.3 in March while Inventories at the customer level fell 6 pts to 33, just shy of the lowest since ’97 as lean remains the focus. The Employment component showed continued improvement, rising 3.4 pts to 58.5, the highest since Jan ’05. Exports fell .5 pt to a still strong 61. The ISM sums up the data with “overall, the recovery in manufacturing continues quite strong, and the signs are positive for continued growth” as 17 of the 18 industries surveyed reported growth. Net-net for the markets though is we’ve priced it in for now I believe.
Both March Income and Spending rose as expected, up .3% and .6% respectively. With the greater rise in spending, the Savings Rate fell to 2.7% from 3% and has now fallen to the lowest since Sept ’08. Because of a .1% rise in the PCE price deflator, real income was up .2% and real spending rose by .5%. The drop in the savings rate and increase in tax refunds has helped consumer spending over the past few months at the same time income growth and job hiring has been muted so in order to sustain, we need the latter to take the baton from the former. Government policy, whether thru zero interest rates or cash for clunkers, cash for appliances, cash for caulkers, and the home buying tax credit do not encourage savings unfortunately but these fiscal incentives are about to fully expire. Who knows when Fed monetary policy will encourage savings? Net-net for the markets, this data was mostly included in the GDP report on Friday so won’t be market moving.
Step 1, get bailout money, check. Step 2, wreck your economy in order to save it, that is what lies ahead for Greece but they have no choice. With the cheap cost of money that Greece will borrow money for the next 3 yrs, Greek market rates are falling both on the short end and longer end of the curve but European stocks and the euro are not getting any bounce as the bailout precedent now established is a dangerous one. It reminds me of the children’s book, If You Give a Mouse a Cookie, he’s going to ask for a glass of milk, etc… The austere measures that other countries will have to take too risks a slowdown in the euro region at the same time China tries to reign in their growth. Chinese reserve requirements will be raised by 25 bps to 17% and this comes after the prices paid component in a PMI index rose to near a 2 yr high. The euro zone is also China’s largest trading partner.
With just weeks away from the expiration of the home buying tax credit, the April NAHB homebuilder sentiment index was 3 pts better than expected at 19 and up 4 pts from March. It’s at the highest level since Sept. Most of the gain was led by the Present condition component which rose 5 pts. Future expectations were up just 1 pt and likely reflects the uncertainty of what will happen to demand when the tax credit expires. Prospective Buyers Traffic rose 4 pts to 14 with gains in the South and Midwest. The Northeast was flat and the West saw a decline of 2 pts.
Feb Personal Income was flat vs expectations of a gain of .1% but Jan was revised up by .2% of a pt to a gain of .3%. Because Spending rose .3%, in line with forecasts, the personal Savings Rate fell to 3.1% from 3.4% and to the lowest level since Oct ’08. While this can sustain short term economic growth, the long term health of the economy in a deleveraging world needs higher savings rates, especially with exploding public sector debt. The headline PCE price deflator was unchanged, therefore REAL income was flat with REAL spending was up .3%. The core PCE was also flat. Bottom line, the Fed will take comfort in the inflation statistics even though the energy component in particular will reverse higher in March but income growth running higher by 2% y/o/y with spending up 3.4% y/o/y can only last for so long with access to credit not what it used to be.
Following a month of free pass data where the Feb economic data was seen as ‘weather related,’ this week brings us a batch of weather clean March news with the highlight being the ISM and Payroll figures. While supply and credit issues were last weeks bond factors, this week will be the economic data. US$ 3 mo LIBOR rose again and hasn’t fallen in 7 weeks. The reflation trade has a bid after Chinese stocks rallied to a 9 week high (copper at near 3 mo high) and was followed by a euro rally after Euro zone Economic Confidence rose to the highest since May ’08. Greece is quickly taking advantage of their new found IMF/Euro Zone support system by coming to market with a 7 yr note. S&P reaffirmed UK’s credit rating at AAA but kept its negative outlook and said “In the absence of a strong fiscal consolidation plan, the UK’s net general government debt burden may approach a level incompatible with a AAA rating.”
Without getting into a discussion on healthcare and its politics, one reality of our soon to be new system is the inevitable further rise in government spending that is headed to 25% of US GDP from its long term average of about 20%. In order to finance this, there will be a smaller private sector and as a result, there will be slower economic growth as nothing is for free. Should the average P/E ratio over the past 100 years of 15x still apply going forward or should there be a revaluation of the multiple paid for US corporate earnings? The one hope that can sustain average multiples over time is the growing mix of exports to earnings as long as the US can make things at a competitive price that the rest of the world wants. I digress, India’s Sensex fell 1% in response to Friday’s rate hike and the rest of Asia followed ex the Shanghai index. With Germany still unclear on what direction they will take with Greece, Greek bonds are down sharply.
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