Sideways


“There is no new ending. Page 750 on is exactly the same.” – Miles (Paul Giamatti) in Sideways

The stock market rallied last month on a strong August jobs report (“the economy is still strong!”) and then went nowhere the rest of the month. On Friday, the stock market rallied again on a much weaker report (“the economy is too weak for the Fed to move!”) – to just about the same level it was after the August report. I mean, can anyone take the stock market seriously these days?

But money is always serious business, even if it is seriously crazy at times. I do expect some breakout in the market’s remarkable lack of volatility soon, but that seems like such an easy prediction that maybe one should be expecting the opposite. There are very few earnings to speak of this month, with the major post-Labor day events to be either the Apple (AAPL) new iPhone release or the next Fed statement, still over two weeks away. It’s entirely possible we’ll just trade in the same range we’ve been in until the Fed has something new (sort of) to say.

There was a distinctly weakening tone to the August data in manufacturing and jobs. Business spending is still falling, and I expect retail sales will be weak too. That might unsettle the markets a tiny bit, but they won’t really take fright until the jobs numbers truly go bad. The Fed won’t have any data reasons to raise rates the 21st of this month, but that doesn’t mean the governors won’t do it. One, they can always pretend otherwise. Two, the bank left rates too low for too long, and needs to give itself a bigger safety cushion before the next recession occurs. The problem is it’s already too late for that, as three, the prolonged period of ZIRP and near-ZIRP (i.e., zero rates) has led to ever-more leveraged and complex trades that will cause ever-more damage if left unchecked.

I hope everyone had a nice Labor Day weekend, and enjoyed the fine summer weather. I fear that markets and the economy are mostly headed south over the next year or so, and it won’t be pretty. But for now, let’s hope for some more indolent times on the back of some more late-summer warmth.

The Economic Beat

Usually this section is quite brief around holiday weekends, but the jobs report leads me to say a little something extra this time.

The headline number was for a gain of 151,000 (151K), seasonally adjusted (SA). That was short on several levels, with the consensus number being in the 175K-180K range and the whisper number for another gain of +200K. Another shortfall was the number of private sector jobs, with a below average number of 126K, far short of the private ADP estimate two days earlier for 177K private sector jobs.

The first salient point is curve-fitting. The seasonally adjusted results are partly guesswork, and August 2015′s results were for a gain of 150K (vs. the current 151K), with 123K (vs. 126K) in the private sector. The results are remarkably similar almost across the board and way too close for coincidence. You may want to note that August 2015 was originally announced as a gain of 173K, giving a slight lean to the chances for a downward revision to August 2016.

The second point is that the unemployment rate has been remarkably stable. A year ago it was 5.1%, in August 2016 it was 4.9% for the third consecutive month and the fifth time this year.

A third point is the lack of wage pressure. A lot of hopeful strategists are writing hopeful fluff about increases in hourly earnings (+2.4%), but that is mostly due to higher minimum wage laws and mix issues. Average weekly earnings are up only 1.5%.

So was the report “Goldilocks” (not too hot, not too cold, the Fed does nothing), a big fat disappointment, or enough reason for the Fed to raise rates in September? All three views are in play, but I doubt that the Fed can look at the report as a reason to raise rates unless they were looking for just about anything to hang their hats on. Keep in mind that the first few jobs numbers of the second half of the year, like the first half, are heavily adjusted; we won’t really know until the October report how good hiring is in the second half.

In other reports, manufacturing was anemic in August. The national ISM report showed a sub-50 reading (the neutral line) of 49.4%. That concealed an uglier number, the growth-vs-contraction score for industries: only 6 growing to 11 contracting. That is quite a turnaround, as was the drop in new orders, from 56.9 to 49.1. The survey don’t tell how much activity is contracting and the responder comments didn’t show any real alarm, so it might just be a blah month. Most of the regional surveys were negative in August, with Dallas (-6.2, 0=neutral) and Chicago (51.5, down from 55.8) rounding out the list.

Factory orders were up 1.9% (SA) in July, thanks mostly to transportation and defense. They remain down 3.1% over the year, with July business cap-ex spending down a whopping 7.2% from July 2015, down 4.1% in total over the last year and yet up 1.5% for the month on a seasonally adjusted basis! People who think the sector is improving aren’t doing their homework.

Personal income was up in July by 0.4% (SA), while spending was up 0.3%. Disposable personal income is up 2.7% year/year, in the middle of the range it’s been in the last four months but down from the first quarter; while spending is up 3.0%, the highest it’s been all year though this is partly due to a lower price deflator. The core PCE inflation reading (the Fed-preferred measure) is at 1.6%, largely where it’s been all year. The Fed will have to look elsewhere for higher inflation.

Pending home sales rose 1.3% in July and year-year construction spending rose to +1.5% – maybe. June had been estimated at (-0.6%) and got a big upgrade to +0.9%, which explains all of the year-year gain. The initial July estimate was for no change. Second quarter productivity was revised slightly lower to (-0.6%), while the trade deficit improved slightly in September.

Next week kicks off with the ISM non-manufacturing survey, along with the little-watched Fed Labor Market Index. That’s about it for the week, with only the labor turnover report (JOLTS) and Fed Beige Book on Wednesday providing additional interest. We still have a long ways to go before the FOMC statement on September 21st.

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