Breathing Room


“Rest, rest, perturbed spirit!” – William Shakespeare, Hamlet

It’s a holiday weekend, giving U.S. markets (and market writers) a breather, so it’s time for another holiday edition. There isn’t much new to say about last week’s action anyway, as it continued with the same theme from the beginning of the year – fears about global growth, too much correlation with the price of oil, followed by fears of a bear market and even recession.

Regular readers know that it’s my data-driven belief (does that make me a central banker?) that we are headed for recession this year. Some believe we are already in one, but the last tumbler of employment hasn’t clicked into place yet – so far as we know – and so I am not quite out on that limb yet. It’s fashionable these days to talk of an “industrial” recession, but as I frequently say, every recession starts with trouble somewhere – it isn’t as if the whole economy rolls over from one week to the next.

Stocks have been oversold for some time now and overdue for a rebound. Even bear markets typically have good rebounds, or at least they do until the capitulation phase, and we are far from the latter now. Technicals suggest a move back to the 1945 area on the S&P 500 would be reasonable (it currently sits at 1865, or about five percent away), and a little push from this Wednesday’s release of the Fed minutes might help. Lately the market has been selling off on Fed news and jobs reports, so the logical thing to do is to expect another big decline Wednesday afternoon. For exactly that reason, the rally might continue, as the markets love to make chumps of those who bet on sure things.

The economic picture hasn’t really changed much otherwise. S&P 500 profits are on track to decline between 3% and 4% overall for the fourth quarter, and the current first quarter estimate is for a decline of 6%, according to FactSet. There was some excitement during the week about “good” retail sales and wholesale trade figures, but that hope was misplaced (for more, see below). False or not, a little hope might permit stock traders to get hopeful again. The FOMC minutes on Wednesday rate to tell the week’s tale, but there are plenty of other potential market-movers in the wings – China, foreign central banks, the Middle East and son on. Volatility is not going to take a breather anytime soon.

The Economic Beat

The report of the week was the January retail sales report, and perhaps after that, the wholesale trade report. Sort of. The former gave occasion to a goodly-sized relief rally in equities, while the latter gave rise to a certain amount of fantasy at the Atlanta Fed that was nonetheless much-quoted.

Retail sales were estimated to be up the expected 0.2% in January, seasonally adjusted (SA). More importantly perhaps, December was revised from a loss of 0.1% to a gain of 0.2% (November had a slight revision downwards, so there was probably some purchase timing moving around), while best of all, the ex-auto, ex-gas number rose by 0.4%.

The number was widely broadcast as showing strong consumer spending, rebounding GDP etc. But it wasn’t a strong number at all, it was a weak one – the year-over-year gain for January was a provisional 1.44% (not SA), well below the average since 1993 of 4.37% and very nearly the weakest since 2009 – at present, it is just a hair ahead of 2010 (1.42%). The revision to December was welcome, raising its year-year rate to 2.99% (partly at the expense of November), but the Q4 overall total gain remains at 2.17% – the weakest since 2009.

The wholesale trade report for December gave rise to some serious fantasy. It was not at all a good number – year-on-year sales fell by 4.2% , marking a clean sweep of negative monthly comps for all of 2015. This led the Atlanta Fed to project a rebound in the first quarter for its “GDP-now” tracker, thereby raising the Q1 estimate and causing considerable smugness and relief in a business media that seemed to largely overlook the forecast aspect.

The Atlanta Fed projection for a rebound appears dubious, however, as the inventory-to-sales ratio remains at a very elevated 1.32, compared to a year-ago 1.23. The Atlanta staff is whistling in the dark with fingers crossed, if you ask me, hoping that somehow the start of the new year will produce a rebuilding bounce (it didn’t last year) but we’ll have to wait until next month to see the reality of the data. If the Atlanta Fed is wrong – and I think it is – then actual data that stays on trend could take its GDP projection down by over a full point. The ratio for business inventories, which include retail goods, is an even higher 1.39. I don’t know where they think a build is coming from.

Labor market news wasn’t much – the Fed’s Labor Market Conditions index weakened, a good thing if you want the Fed on hold. The previous month was revised down to 2.3 from 2.9 while the current read fell to 0.4. The index is subject to large revisions and hasn’t gained much traction in the minds of stock market traders. In the category of labor turnover, the JOLTS report revealed the same picture it has had for months now – openings well up from the year-ago period, while hires are virtually unchanged. Weekly claims had a good week after a somewhat elevated start to the year, and markets took some comfort there.

Financial and political markets alike were spooked by Yellen’s “not impossible” prospect of negative interest rates, but import-export prices have been parked in negative territory for many months now. The first read on January was (-1.1%) for import prices and (-0.8%) for exports, with the year-on-year totals now standing at (-6.2%) and (-5.7%) respectively. There is no good news in the details: global trade has been weak for some time and isn’t showing any signs of a rebound.

Next week is a busy one, though shorter than usual with the U.S. holiday. Tuesday starts off with the New York Fed survey, a report that has been so deep in the basement that it seems due for some kind of bounce. It’ll be followed later by the homebuilder index, a sector that has remained in good shape. The Philadelphia Fed survey follows suit on Thursday.

Wednesday brings housing starts and industrial production for January, both key indicators of the direction of GDP. Producer prices for January come Wednesday and consumer prices Friday, but the market will likely be most interested in the release of the Fed minutes on Wednesday afternoon.

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