“Lend thy hand, and pluck my magic garment from me.” – Prospero, in William Shakespeare’s The Tempest
The day before the release of the retail sales report, I wrote that the market’s short-term upward momentum would not be easily slowed by an anemic retail sales report, given that weakness was already expected and would come with a built-in weather excuse. Unless, I qualified, the report was a real clunker. That was indeed the case, as it fell well short of expectations for a (-0.1%) decline with a (-0.4%) result instead, accompanied by a good-sized downward revision to December too. It was not enough of one to bother traders – although futures did sell off immediately and the stock market opened down, prices climbed back right from the opening bell.
It was all the weather, you see. Or at least that was the excuse given by buyers, who were more focused on riding the chart rebound back up to the 1850 level on the S&P than any bother about a few cowardly shoppers staying home. It’s the reverse of January: When support attempts couldn’t get traction, lower lows ensued. Now when selling attempts lack volume, resistance levels are burst through instead. As for the economy, well, sales excluding autos were flat, and that’s a pretty great performance after all this weather, isn’t it? It has to be so, because stock prices were up. On the other hand, the report also led to another downgrade of estimated fourth quarter GDP, originally reported as 3.2%. It’s now thought to be lined up at around 2.2%, and the first-quarter GDP run rate has been similarly downgraded, to as low as 1%.
So much for the warm and fuzzy glow of the first week of January, when major agencies – the Fed, the International Monetary Fund, and the World Bank to name three, all not coincidentally based in Washington, D.C. – were predicting a pickup in global growth that would be led by the U.S. Don’t worry though, the Street will just shift its predictions for a growth resurgence to the second half of the year, as it’s done every year since about 2005, if memory serves correctly (don’t misunderstand – at this time of year, the Street always says that things will get better in the second half. I’m referring to the we’re-going-to-make-it-up-later prediction).
The parlay from the jobs report remains intact for now – either it’s the weather (apparently it didn’t used to snow in the winter) and just a passing phenomenon, or it isn’t and then you better get out in front of the “taper the taper” rally, because experience suggests that it will all have happened within a few hours of the Fed’s inevitable rescue announcement. The FOMC’s (monetary policy committee) next statement is March 19th, and the bank is sure to say something miraculous along the lines of thinking about doing something if things get worse.
However, those hoping for a liquidity-fueled repeat of 2013 are likely to be disappointed, much like the true believers of 2000. There are many reasons why we won’t see a repeat, ranging from the economy to the Fed.
Start with the economy. The weather has indeed been a drag, though admittedly no one can be sure of precisely how much. The Fed governors are aware of the weather as well as anyone else, and aren’t going to overlook it either as economic data comes out. Should the next revision of fourth-quarter GDP come in at 2.2% in two weeks time, it’s not enough of a reason to reverse a policy (QE) that seems to have less and less effect on the real economy, according to the central bank’s own research. If the first quarter does end up with say, 1.5% GDP growth, the weather effect is still amorphous enough not to reverse course. Once winter fades, there will inevitably be a rebound effect, so the bank may have to wait until the third quarter before it feels comfortable saying anything about the true core rate of growth (though it probably will have cut its 2014 forecast by the June meeting).
Keep in mind that the only tools the Fed have left are forward guidance and more QE. It can’t run about ramping up money-printing for every bump in the road. Its bond purchases have succeeded in raising asset prices by progressively raising the ante each time; that option isn’t in the cards anymore, not when the price tag is a $5 trillion balance sheet. It’s also a mid-term election year, and I suspect that the governors would really like to be out of the program entirely come November.
Finally, as dovish as Janet Yellen and the others may want to be, there are a couple of realities confronting the bank. One is the lack of ammunition for any crisis that might pop up before the current QE program is back to zero again. QE is partly a psychological effect, and backing out of taper in mid-stream is likely to induce considerable anxiety after the initial euphoria wears off.
The other is the nature of the Fed’s charter. Quantitative easing has been predicated from the beginning on improving employment, a goal handed to the bank in the 1970s by the Humphrey-Hawkins act. The unemployment rate is unlikely to back up anytime soon, given that unemployment is a lagging indicator and so far as the business cycle goes, is one of the last parts to contract. A resumption of QE over a weak GDP print and the stated fear that unemployment might worsen would be politically lethal – the central bank is only as independent as Congress says it is.
The economy hasn’t shown any signs whatsoever of accelerating to a real 3% growth rate. The inventory restocking episode from last year is demonstrating itself to be just that. I couldn’t believe my ears on Thursday when I saw a fellow on CNBC say with a straight face “well, the economy really is getting better this year.” It’s only getting better on the same basis it’s gotten better the last five years – somewhere over the rainbow.
The current stock market rebound is getting stretched: The S&P has nearly reclaimed its January high, while the Nasdaq is making new post-2000 highs. All of that in spite of some pretty weak data in the last ten days, with probably more coming from the housing sector next week – it doesn’t rate to have done well in this weather either. That said, equities could still squeak out another mild gain next week, after a breather here and there, if the release of the FOMC minutes on Wednesday (probably the week’s pivot point) permits. I’ve been talking about a first-quarter top for stocks since the beginning of the year, and my prediction is still intact, but it still appears to me to be a top to sell, not to buy.
A reminder to readers that all U.S. markets are closed on Monday, February 17, for the President’s Day holiday.
The Economic Beat
The report of the week was indeed the retail sales report. As noted above, sales fell (-0.4%) and were flat (seasonally adjusted) when excluding autos. I would note that the twelve-month growth rate in ex-auto, ex-gasoline sales (the so-called “core rate”) fell to 2.96%, the first time it’s been below 3% since August 2010, when the rate was still rising on the recovery. You can’t blame all of the weakness on the weather, either, because the rate has been steadily falling throughout 2013, and was as low as 3.11% in November. Utility bills and a loss of unemployment benefits are hurting spending. The rate is apt to fall again next month before getting a weather bounce in the spring: February sales data are also feeble so far (with more bad weather on the way this weekend).
Industrial production also came in much worse than expected, at (-0.3%) instead of +0.3%. No problem, it’s the weather – stocks again shook off morning weakness and rallied. Production was down across the board, except for utilities. The annual growth rate is still running about 3%, and as was the case with retail sales, there was no indication in the data prior to the data that things were heating up. Production oscillates somewhat depending on various factors, so there are highs and lows, but generally speaking, the levels of growth have been slowly subsiding over the last few years.
Weekly claims data continues to run a little higher than expected, though this too may be weather-related. The week ended was the measurement week for the jobs report, with the first week of claims only about 4% lower than the year-ago level. That doesn’t necessarily affect the counting of the data sample, but it does affect the seasonal adjustment factor, which has made the headline jobs numbers look unduly weak the previous two months. For example, the labor turnover survey (JOLTS) showed some mild improvement in December 2013 versus December 2012, another indication that the 75,000 print for seasonally adjusted job growth in the more recent December was too low. Other than that, little change was noted in the report.
Import-export prices actually got a little boost in January, only partly due to energy, rising 0.1% and 0.2% respectively. The year-on-year rates are still negative, running between minus one and two percent.
Wholesale inventories fell in December, leading to another cut in fourth-quarter GDP, but the month’s increase in wholesale sales looked to be quite normal. Perhaps that will lead to an inventory pickup for January, though that may reverse in turn from February’s bad weather.
And of course, the real report of the week was Janet Yellen’s testimony before the House Financial Services Committee, in which she said nothing new at all. Will the Fed continue to taper? Yes. Might the Fed revisit its policy if things get significantly worse? Yes, with a “duh” tacked on, as no Fed chairperson could ever say otherwise. Whatever the Fed’s new chair may have meant, the market heard “Yellen put” and prices rallied all day.
Next week should revolve around the FOMC minutes. Monday is a holiday and there is a slate of housing-related data during the week that probably won’t be good, but the growing tendency to toss out every bad number on weather-related grounds should mitigate some of that – depending on what traders think that the minutes mean.
The New York Fed reports its manufacturing survey on Tuesday, and the Philadelphia Fed reports Thursday. I wouldn’t expect much from either one, but the surveys are partly sentiment-based and could surprise in either direction. The more important housing data include the homebuilder sentiment index on Tuesday, which should tell you the direction of the housing starts report the next day. Existing home sales come on Friday, and those should decline as well.
Other reports include the producer price index (PPI) on Wednesday and the consumer index (CPI) on Thursday. The latter day also comprises another “flash” PMI estimate for the U.S. and the latest leading indicators, which seem to get very little attention anymore. There was a time when the report was a very big deal, mainly due to the non-existence of many other reports that we now take for granted. Overseas, watch the period between Wednesday’s close and Thursday’s open in the US: China and Europe will report a bucket of PMI data.