Economic Reports Scorecard – 10/24/15 to 11/6/15

bi weekly economic review 11-7-15

The economic data of the last two weeks stands in fairly sharp contrast to the markets’ movements. Markets, particularly bonds and gold, are going all in, betting that this time Yellen & Co. have it right, that growth is really about to accelerate this time. From the end of the last FOMC meeting to the employment report last Friday, the 10 year Treasury yield jumped 30 basis points while gold fell $75 over 9 straight down days. The US dollar index rose more than 2% and is nearing the high set in the spring of this year. The move in stocks hasn’t been as dramatic but still the S&P 500 is up about 1.5% since the Fed took a more hawkish stance on interest rates.

us dollar

These moves are powerful indicators of the market’s anticipation of higher growth. It is disconcerting though to see that the moves have been almost entirely a result of Fedspeak rather than actual economic data. The data from the last two weeks, if anything, continued to deteriorate. There were some positive reports along the way but overall the ratio of positive to negative surprises favored the denominator by slightly less than 2 to 1. The divergence between the industrial/manufacturing side of the economy and the service side continued. Most of the Fed manufacturing surveys showed contraction, durable goods orders fell again as factory orders disappointed and while the ISM was a slight beat, it came in just above the contraction line at 50.1.

The trade report showed a small rebound in exports but the drop in imports is concerning. That isn’t a sign of strength but rather what we see around every recession; it indicates weak domestic demand. Yes, some of that was due to oil prices but that story is getting long in the tooth – low oil prices isn’t news anymore. Construction spending was higher but in general the news on real estate was worrying with both new and pending home sales disappointing and falling. Real estate and autos – which are selling at over an 18 million annual rate – have been the leaders of the economy since the manufacturing/shale slowdown started. To see one potentially stumble is or should be concerning.

There were some good reports too, last Friday’s employment report only the most recent and obvious. It was a good report although I wouldn’t say, as the market seems to be, that it assures a rate hike in December. We’ve been down this road a few times already this year and been disappointed each time. Other positives were the service sector reports such as ISM which blew away estimates at 59.1. The Chicago PMI also surprised to the upside although it is important to remember that the Chicago iteration includes services. Another positive was the productivity report which was at least in positive territory if not as good as it needs to be. There was also, within the employment report, a decent rise in wages something taken as an unalloyed positive. I’m not so sure since passing it on in the form of higher prices would seem difficult at present. That means companies will either get by with fewer workers or fewer profits until they can.

Again, though, while the data has not improved, the market is anticipating better days ahead. TIPS show a rise in real growth expectations even as inflation expectations stabilize, at least short term. Credit spreads have also narrowed over the last month although the widening trend appears to be intact.

5 year 5 year forwards

 

5 year tips

 

baa spreads

While all these market based measures have improved over the last couple of weeks, none of them have broken their previous trends. Credit spreads are still widening, TIPS are still predicting pretty miserable real growth and inflation expectations are still falling. If the dollar continues to rally, I would expect those trends to be reinforced over the coming weeks as that will suppress inflation, push commodity prices lower (increasing pressure on the shale sector) and further weaken emerging markets.

Markets seem to be getting a bit ahead of themselves. The Fed has certainly expressed a desire to raise interest rates and the employment report that Yellen deems most important to her decision making supports the notion. But employment is generally a coincident or lagging indicator and much of the forward looking data today (ISM, factory orders, inventories, core capital goods orders) doesn’t look nearly as rosy as that employment report last week. Bulls can find some comfort in the weekly jobless claims which are considered a leading indicator and continue to track below 300k. But one might also consider the recent GDP report which showed growth of 1.5% quarter to quarter but also a significant slowing of the year over year rate to 2%. That’s right in the range we’ve seen through this entire recovery.

Was last week’s employment report a harbinger of better economic times ahead? The Fed and the bond market seem to think so. I wouldn’t bet on it just yet. Unless raising rates actually increases growth rather than the other way around, I’d prefer to wait for some kind of evidence – something in the leading indicator category – before jumping on the bandwagon. Right now, we’re right where we’ve been – deep in the new normal.

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This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Investments involve risk and you can lose money. Past investing and economic performance is not indicative of future performance. Alhambra Investment Partners, LLC expressly disclaims all liability in respect to actions taken based on all of the information in this writing. If an investor does not understand the risks associated with certain securities, he/she should seek the advice of an independent adviser.