“At the narrow passage, there is no brother and no friend.” – Bedouin Proverb
Well, so much for the late August rally I’ve been talking about. Despite my prognosis that we were set up for one, it never really got traction after the far more serious business of Middle Eastern conflict dislodged – temporarily – the Fed policy speculation that was running low on fuel anyway.
We certainly were set up for a move back upward, and things were moving in that direction before external events intervened. The market had been short-term oversold to a pretty fair degree, yet it subsequently returned to that state when rattled around by the latest hints of attacks and postponements thereof.
This is a holiday column and there is already ample discussion in the Economic Beat below, so I will keep the speculation short. It’s really going to be a waiting game for the next week anyway, if not the next three. Will portfolio managers start selling when they come back from vacation on Tuesday? August turned into a dreary month (down a tad more than 3%) that might prompt some trimming ahead of what could be a turbulent month.
What about the jobs report? We’re waiting for the one remaining edition before the meeting that the whole financial world is waiting on this September 18th, the Federal Reserve’s “to taper, or not to taper” show. The former arrives Friday next, and as usual I make no prediction thereof. Surveys haven’t indicated any special hiring strength, but layoffs have eased slightly from July and while it can be dangerous to model hiring from them, the initial estimates probably take them into account.
It doesn’t feel like hiring is going up at all, and it doesn’t seem likely that the leisure category that helped prop up May and June would remain strong in August. In real time, I suspect that a number below July’s 160K could be in store, possibly even back to the 120K level, but models are models and the reality comes later, along with the revisions. I wouldn’t be surprised by 200K either, as recent consumer sentiment indicators have improved.
Tuesday is the first day of the new month, and if there’s a decent ISM manufacturing number like there was in August, one might expect an oversold market to rally. An awful lot could happen over the long weekend, though, and as first trading days of the months go, September is more unpredictable than most. I still lean towards a rebound next week, possibly aided by EU data or the European Central Bank (ECB) meeting on Thursday, but the geopolitical situation makes it all a guess. If there is a Syrian-inspired sell-off, people like me will be looking for an entry point to trade on – such pullbacks are short-lived, and traders know it.
As for the fundamentals, which have been of little import this year (the excuse being the long-standing one that Fed-fueled growth lies just around an ever-elusive corner), the economy was sluggish in July, as you will see below. We might have gotten a little rebound in August, though, that could temporarily change the discourse in the market’s favor, even if nothing fundamental has really changed underneath. It’s just the way the system works.
It may seem incongruous to say I wish all readers a most enjoyable Labor Day weekend while we’re all waiting to see if missiles start flying in Syria, yet there is always a conflict somewhere and we all must also rest from worries from time to time. I remind those abroad that all things financial in the US will be closed on Monday.
The Economic Beat
The report of the week was either the latest revision to second quarter GDP or the July personal income and spending report, depending on whether you want to be an optimist or a pessimist. Personally I was a little dubious about the GDP revision to +2.5%, but time (and further revisions) will tell. The price deflator, which I’ve already complained about as unrealistically low, inched up to 0.8%, when it probably should be around 1.2%.
The rest of the changes came down to big revisions upward in non-residential fixed structures and exports, along with a big downward adjustment in imports. It seems more than a little fishy to me, especially looking at the rest of spending, but I’ll withhold judgment. We’ll get the latest details next week, with Tuesday offering the new construction report, and Wednesday the trade report. One concern of mine is that the import-export adjustments may be mostly energy-related, with oil companies taking advantage of higher offshore oil prices to ship more product abroad as consumers here cut back on expensive imported gasoline consumption, with the BEA telling us all the while that energy prices fell sharply in the quarter.
If personal income growth continues at the same rate, it’s going to be hard to break out of the “new normal.” Year-on-year real disposable personal income was up 0.8% in July, largely the same trend it’s been in for the last five months. Real spending was up 1.7%, also in the same trend (between 1.7% and 2.0% every month this year). The monthly changes of 0.1% for both categories were on the soft side and below expectations.
That the third quarter did not get off with a bang could also be seen in the July durable goods report. New orders were negative, with or without transportation, as was the business investment category. Shipments, which go into GDP, were also negative (-0.3%) and could be negative again in August in light of the new orders data.
Housing was a little better, but only a little. The price increases reported by Case-Shiller remain satisfactory (+12.1% year-on-year), but the pending home sales report (which feeds to the existing home sales report and doesn’t count new home sales) showed a drop of 1.4%, the second monthly decline in a row. Weekly mortgage-purchase applications have steadied, though, even as rates have continued to rise. There could be some fear factor at work.
Manufacturing was a bit brighter and seems to have gotten a rebound in August. The decline in durable goods for July was a big miss from consensus and belied some of the impressive-looking PMI surveys that came out in early July. But August may have finished on a roll, as four regional reports (Kansas City, Richmond, Dallas, Chicago) all posted decently positive results. The national manufacturing PMI (called the ISM) is released on Tuesday, with current consensus around 54.
With one week to go before school, the weekly retail chain-store reports for August were decidedly soft. Perhaps we’ll get a late flourish. Both sentiment reports, the Conference Board and the University of Michigan, were at good levels over 80, which might portend well for next week’s jobs report.
That will be the big event next week, although there will plenty of good data beforehand, beginning with the aforementioned ISM manufacturing report on Tuesday. The non-manufacturing edition comes out Thursday.
Also as noted above are construction spending on Tuesday and trade data on Wednesday, which should see the rest of US auto sales for August. Thursday will have some same-store sales data and the factory orders report for July that updates durable goods, along with the ADP payroll report. Friday is the big one, of course, with the consensus for job gains at a cautious 175K. The EU will report its latest PMI on Monday, its GDP and retail sales on Wednesday and the ECB statement on Thursday. Monday is a US holiday, and I still refuse to accept that summer is ending!