Today wraps up the Kansas City Fed’s annual Jackson Hole, Wyoming conference. This had been the venue (two of the past three years) for the announcing of two rounds of quantitative easing (printing money and buying bonds and mortgage securities—the proceeds of which remain in bank excess reserve accounts at the Fed earning .25%). This year, as anticipated, no such fireworks are taking place. I’ll give the pertinent detail and my thoughts over the weekend. In the meantime, below are the highlights from my market/economic notes of the past couple of days (cleaned up [with a little added venting regarding money-printing] for your reading). As you’ll see, the data generally support the notion that the U.S. economy is gaining some traction:
AUGUST 20, 2014
Fed minutes suggested that a minority of the board members are looking to push rates higher sooner, if they can gain a consensus. They’ll remain “data dependent” of course… Last month’s meeting (in that there appears to be a stronger push for—and/or more members leaning toward—a rate hike before late 2015) supports my view that the underlying pressures could, sooner than later, show up in PCE (Personal Consumption Expenditures [the Fed’s preferred inflation measure]). Ultimately, there are board members who are concerned with the potential for an abrupt sell-off in the credit market that could play havoc with the economy and equity markets. The dollar gained, bonds and gold dropped… I think the gold bugs could be very disappointed this year. As the economy continues to gain traction (assuming it does) we’ll see the dollar either strengthen further—as interest rise and inspire money flow to dollars—or, at a minimum, prove resilient. Neither scenario bodes well for gold.
I remain optimistic on industrial metals, particularly copper—despite the threat of a stronger dollar and the following re; China. At the end of the day, I’m assuming there is no recession (in the U.S. that is) on the horizon (although things can change in a hurry). My best guess (outside the U.S.) is that over the course of the next few quarters the Eurozone will show slightly better growth (although there’s cause for doubt), and emerging markets will deliver relatively strong economic results…
China’s flash PMI (last month’s preliminary manufacturing Purchasing Managers Index) came in below expectations at 50.3, vs 51.5 estimate and 51.7 in July. Chinese stocks fell on the news, as did the Australian dollar (natural resource-rich Australia’s economy is strongly tied to China’s). Pundits are calling for looser policy in China to boost aggregate demand if they have any hope of hitting their 7.4 growth target this year. I.e., print money and get people to spend it to give the illusion that the economy is growing. My view is that excessive and prolonged monetary stimulus diverts resources from their otherwise more productive use. For example, when lending rates are bought down by intervention, capital will redirect to sectors that are heavily debt-dependent, such as housing. When such redirection is not where the market would otherwise have demanded, pricing distortions develop, then correct when the stimulus finally ends, or when the market has had enough. The 2008 bursting of the U.S. credit/real estate bubble is a classic example.
Re: Copper: A Bloomberg article just published reports an anticipated rebound in copper as demand expands amid signs of tightening supplies…. Standard Charter forecasts… The chart of the day shows the 12 month copper consumption rising to a record in China, while the use in the U.S. climbs to the highest since 2009. Global inventories have declined by almost 50% this year…
The CFTC Commitment of Traders report shows non-commercial speculators are slightly short (betting it’ll drop) copper. While commercial users (smarter money) are slightly long (betting it’ll rise)…
A number of indicators were published today… each one confirming the view that the U.S. economy is indeed accelerating, while much of the rest of the world is struggling to find footing. Minyanville summed it up nicely:
- The S&P 500 (SPX) hit a new all-time high of 1994.76 today as positive economic data gave the bulls confidence ahead of Fed Chair Janet Yellen’s speech in Jackson Hole on Friday.
- Jobless claims came in at 298,000, beating the 315,000 forecast by economists.
- The August Markit US Manufacturing PMI was 58.0, above the 55.7 consensus and an improvement from last month.
- Existing home sales were 5.15 million in July, slightly exceeding the 5.02 million consensus, though June’s figure saw a slight downward revision.
- The August Philly Fed Index hit 28.0, well above the 19.7 consensus.
- And finally, the Leading Economic Indicators Index rose 0.9% in July, above the 0.6% expected.
- Overseas, the data was mixed. China’s August HSBC Manufacturing PMI disappointed, as did the Eurozone’s manufacturing and service PMI’s.
- August’s survey delivers further evidence that robust manufacturing growth momentum has been sustained through the third quarter, with overall business conditions improving at the fastest pace for over four years.
- Stronger employment growth was a key factor boosting the headline PMI reading in August. Staff hiring picked up to its sharpest for around a year-and-half, providing an early indication that the US manufacturing sector has generated in excess of 20,000 jobs over the month in August.
- Export sales finally showed signs of improvement, despite relatively subdued business conditions in some key markets, with the latest rise the steepest for three years.
- Overall, with job hiring gathering momentum and input buying expanding at the sharpest pace for at least seven years, it seems US manufacturers are increasingly confident that the recovery is firmly back on track and are gearing up for a sustained rebound in production schedules over the months ahead.
Input cost inflation was unchanged since July and remained subdued in comparison with the survey’s historical average. August data also indicated a further rise in manufacturers’ factory gate charges. The latest increase in output prices was little-changed from July’s seven-month high, and a number of survey respondents reported passing on a proportion of their higher input costs to clients in August.
- The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.9 percent in July to 103.3 (2004 = 100), following a 0.6 percent increase in June, and a 0.6 percent increase in May.
- “The LEI improved sharply in July, suggesting that the economy is gaining traction and growth should continue at a strong pace for the remainder of the year,” said Ataman Ozyildirim, Economist at The Conference Board. “Although housing has been one of the weakest components this year, the sharp gain in building permits helped boost the LEI in July. Financial markets and labor market conditions have also supported recent gains, but business spending indicators remain soft and their contribution marginal.”
- “The pace of economic activity remained reasonably strong in July,” said Ken Goldstein, Economist at The Conference Board. “Although retail sales were a little disappointing, hiring and industrial activity improved. July’s increase in the LEI, coupled with its accelerating growth trend, points to stronger economic growth over the coming months.”
- The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2 percent in July to 109.6 (2004 = 100), following a 0.3 percent increase in June, and a 0.2 percent increase in May.
- The Conference Board Lagging Economic Index® (LAG) for the U.S. increased 0.2 percent in July to 124.6 (2004 = 100), following a 0.5 percent increase in June, and a 0.4 percent increase in May.
Here’s commentary from the Philadelphia Fed:
Activity Index Highest Since 2011
- The diffusion index of current general activity increased from a reading of 23.9 in July to 28.0 this month. The index has increased for three consecutive months and is at its highest reading since March 2011 (see Chart). The new orders and shipments indexes remained positive but fell to near their levels in June. The new orders index decreased 20 points, while the shipments index decreased 18 points.
- The current indicators for labor market conditions suggested continued modest expansion in employment. The employment index remained positive for the 14th consecutive month but declined 3 points from its reading in July. The percentage of firms reporting increases in employment (25 percent) exceeded the percentage reporting decreases (16 percent). The workweek index was positive for the sixth consecutive month and increased 1 point.
Price Pressures Moderate
Nearly 30 percent of the firms reported higher input prices this month, but this was lower than the 36 percent that reported input price increases last month. The prices paid index decreased nearly 10 points from July to its lowest reading in three months. The prices received index, which reflects firms’ own final goods prices, also decreased, from 16.8 to 4.2. The 12 percent of firms reporting higher prices was notably lower than the 21 percent reporting higher prices last month. Over 79 percent of the firms reported steady prices for their own products this month.