August Times

“When the weather’s fine, we go fishing or go swimming in the sea.”- Mungo Jerry, In the Summertime

As we roll into the doldrums of the unofficial last full week of summer, torpor abounds. The Olympics will have ended, most of the big-money types are on vacation somewhere and there is very little of interest on the financial calendar.

One never knows, however. Last week’s release of the latest Fed minutes were a rather dull affair, showing a central bank that is still comfortably stuck in a weighty-pondering phase. The data have really suggested very little in the way of definitive strength, and with easy financial markets being the best thing the U.S. economy has going for it right now, Fed officials are very reluctant to do anything that might invite a storm of political wrath. Better to keep up the verbal game of sending out the odd governor to warn the markets when they’ve been a little too hot and buck them up when they’ve been a little too cold. Hey, this policy stuff is easy!

Yet there is still Jackson Hole (Wyoming), which besides being a scenic spot with great skiing in wintertime, is the sight of the Kansas City Fed’s annual monetary policy symposium next week. Former chair Ben Bernanke used Jackson Hole to unleash QE2 way back in 2010, and QE3 followed in 2011. Nothing of that import is expected this time around, but one never knows and there isn’t much else to talk about right now. Expect the usual menu of dry model presentations along with more newsworthy allusions to what the Fed might do if the situation calls for it, though the current situation will most certainly be said to not call for it.

The allusions are unlikely to be truly newsworthy, but what else is there to talk about? The markets are Fed-obsessed, and at these prices one can hardly blame them – any rational look at earnings, prices and valuations would mean big trouble, so let’s talk about Fed policy instead and rub the TINA (“there is no alternative”) rabbit’s foot instead. With the presidential election looming, don’t look for the Fed to do anything the least bit disturbing at its next two meetings in September or November (1st and 2nd) – it will only act if some major storm appears and forces its hand.

The slight decline in last week’s market was more related to options expiration than anything else – I actually thought that the S&P might close closer to 2170 than 2180, but an afternoon rally ensued Friday after most of the positions had been closed out (got to get an early start on weekend traffic). Barring a geopolitical shock, I wouldn’t expect much of anything this week either. We’re headed into the market’s “silly season,” a traditional time for an upward bias to trading on very light volume. It could get a lift if the Fed hands out hints of Christmas candy at Jackson Hole, but there really isn’t anything to talk about this week aside from repeating the usual admonitions – S&P 500 earnings have declined about 3% in the second quarter, that makes for the fifth quarterly decline in a row, the economy has been gradually slowing for over a year, and valuation measures are in nosebleed territory. So let’s talk about the Fed instead. Or oil. Or anything but reality.

The Economic Beat

It’s hard to single out anything for the report of the week this time around, but I’ll go with the July industrial production report. It surprised to the upside with a +0.7% monthly gain (seasonally adjusted), with some of the lift coming from a downward revision to June (+0.6% to +0.4%). The biggest contributor was utilities, a nod to the warm temperatures across the U.S. this summer. Even mining (which includes oil drilling) kicked in with a gain, though it is still down 10.5% year-on-year. Most of the year-on-year data ranged from anemic to downright weak, with an overall activity change of (-0.5%), final products at +0.1%, consumer goods at +0.7% and business equipment unchanged. So July was a lift, but I wouldn’t look for a trend change.

A couple of good reasons not to get carried away with July industrial production came from the two high-profile regional Fed manufacturing surveys. New York chipped in with another weak monthly reading of (-4.21), where zero is neutral, and very little change in new orders. The Philadelphia Fed reading was better overall (+2.0), but new orders were much worse with a decline of (-7.2). These are diffusion readings and don’t measure actual activity levels, so the easing could actually be quite mild, but one thing they certainly don’t show is strength. The Philly employment reading was also quite weak at (-20), though going by other data, it might be more indicative of a lack of hiring interest and broad yet mild attrition. For me, it’s another sign of a cycle winding down but not falling over quite yet.

Housing data was positive, though not as positive as the accounts I heard on radio and television. The homebuilder sentiment index on Monday was solid at 60, right on consensus and up a tick from the previous month’s 59, though the difference is trivial. Housing starts are what seemed to wow the crowd the next day with a monthly gain of 2.1% (0.5% for single-family) in July, but there really wasn’t anything new in the trend. Starts overall are currently showing a 6.7% gain year-to-date (unadjusted), in the same 6%-7% range they’ve been in nearly all year. Last year’s strength was in multi-family units and this year’s strength is in single-family (+10.6% year-to-date). July showed something of a slowdown in the single-family pace and a boost in the multi-family area, in other words little more than monthly noise in the data. You can laugh at any newsreaders excitedly announcing that housing is “finally recovering,” because the current growth rate is the slowest since 2011.

There is some debate in the air over the latest consumer inflation readings. The overall CPI was unchanged in July at first estimate, and the trailing-twelve-month (TTM) gain is only 0.8%. Good for consumers. The ex-food, ex-energy reading TTM gain now stands at 2.2%, which is good news for the Fed, though the CPI isn’t its preferred reading. I suppose it can constitute a glimmer of good news for the bank’s inflation targets (about 2%), but the CPI has been 0% and 1% annually for some time now, making any claims about real inflation fairly suspect. The old maxim is that when higher inflation readings finally arrive it is already too late, but CPI was unchanged in July and overall PPI was down 0.4%. Apart from the volatility in the oil patch and the relentless upward march in drug prices (a march driven by the corporate suite rather than consumer demand), there just isn’t any consumer inflation.

Claims remained subdued last week (262K, seasonally adjusted) and weekly chain-store sales remained soft. The evidence is mounting for another weak retail sales report, but it’s a good three weeks away.

Next week will bring the rest of the major monthly reports on housing, with new-home sales on Tuesday and existing-home sales on Wednesday. There are Fed surveys throughout the week, with the Chicago national index on Monday and regional surveys from Richmond on Tuesday and Kansas City on Friday. The week’s main interest comes at the end, with July durable goods orders on Thursday and the first revision of second-quarter GDP on Friday. A change in the price deflator could lead to a surprise gain in the latter, but I look for very little change in four-quarter nominal (actual dollar) GDP. Enjoy the week!