Creeping Closer to the End

“Living is easy with eyes closed, misunderstanding all you see.” – Lennon-McCartney, Strawberry Fields

So let’s see – the stock market eked out a narrow gain last week, leaving it where it was a month ago and barely 2% ahead of where it was a year ago (this week). It was another week of The Great Sideways Market.

As for what’s new, well, we did get the last presidential debate, and while it wasn’t really new, in light of the quality and all of the mudslinging, I would like to thank the heavens that the debates are newly over (although the very funny SNL parodies have almost made them worth the trouble).

We got GDP news out of China. The country told us that it was steady at 6.7%, the same as it’s been for three quarters now. Although the Chinese do not release non-fiction versions of their data, there are some inferences that can be gleaned, in particular the direction of the change. If the country says GDP has been steady for the last three quarters, what it is trying to tell us is that the growth rate has been about the same. Sort of. It might be chugging along anywhere between zero and seven percent a year, going up or down a percent or more from quarter to quarter, but what the government is really telling you is that it doesn’t deem it appropriate to either brag or hit the panic button, and in the meantime, it likes the look of no change. Anyone who goes around quoting Chinese GDP data as reality is trying to sell you something.

At the same time, the rise of stories and troubling data about the country’s debt-to-GDP ratio and its burgeoning corporate debt problems is something to worry about. Credit markets have a way of chugging along for many months without apparent harm after disturbing credit ratios start to attract attention. When they blow up is very difficult to predict, but one thing we do know is that you can’t hide bad debt forever and that when credit does blow up, it’s bad for everyone.

So far as other things we learned last week, the answer is not much. About a quarter of S&P 500 companies have reported earnings so far, and the estimated decline is now about 0.3%, according to FactSet. That suggests to me that earnings will be up about 1%-2% from a year ago, which in turn implies that overall earnings are still lower than two years ago, while the index is up 4% on a price-only basis over the same period. For now, that is, as the index has spent most of the last two years in a range of plus or minus a couple percent, and may well head back there in the near future. Prices typically start to sell off in late October or early November, though the lack of any discernible earnings rally yet this quarter may obviate that phenomenon.

For the moment, it looks as if everybody is going to stay on hold until either the October jobs report a week from this Friday, or the election. Even the price of oil has been meandering – after being verbally cudgeled higher by yet another protracted episode of OPEC threats to do something this time (the talk is designed to scare the short-sellers), the absence of any real action has left the rally adrift.

A similar situation obtains in Great Britain. I’ve been watching the Brexit situation in horror since before the vote, itself a terrible idea and an outstanding example of why it’s madness to govern by referendum. Brexit supporters are living in a dream state, understandably so because apart from the drop in the pound – and that really ought to be telling you volumes – it feels like nothing bad has happened yet. There is all the talk about the exit, of course, but the infamous Article 50 hasn’t even been invoked yet and so the English are in the position of the chap falling from a 100-story tower – as he passes each floor, he thinks, “so far, no problems encountered on the trip.” It’s not the fall, it’s the landing, but a recent poll shows the country still favoring getting rid of its relatively few migrants over having trade. Yes, well, good luck with that.

The ability of the business cycle to keep hanging on by a thread is impressive, and led to much talk of prolonged, cycle-free expansion. Of course, because you see that although all good things must come to an end, this time is different. See you next week.

The Economic Beat

A relatively quiet week was marked by contrasting reports in housing and manufacturing. The New York Fed manufacturing survey started off the week on a down note with a headline reading of (-6.8), down from (-1.99) the previous month and below expectations for a slightly positive print (0 is neutral in the survey). New orders and employment were also negative, while shipment responses indicated flat conditions.

That segued into a weak report on housing starts, which fell more than expected, though building permits rose. The weakness was centered in multi-family units, but even so it isn’t easy to dismiss the report as one month’s data, as the year-to-date comparison with 2015 slipped into the negative column (+3.6% for single-family). Given the strength of the homebuilder sentiment survey, unchanged at a still-high 63 and the increase in permits, there’s a good chance that the month has exaggerated the weakness, but it bears watching.

The foregoing reports were partly contradicted on Thursday, first by the Philadelphia Fed survey in manufacturing and then by the September report on existing home sales. The Philadelphia survey checked in at a reasonable 9.7, down from 12.8 the month before but still reasonably positive. New orders (16.3) and shipments (15.3) were strong, though some components lagged, notably employment. Over in housing, existing home sales rebounded with a 3.2% monthly gain to 5.47mm rate, seasonally adjusted and annualized. However, August was revised down slightly to (-1.5%) and the year-on-year rate edged down from 0.8% to 0.6%. It was a decent report, but one should note that overall, housing activity appears to be drifting towards the flat-line. The Fed’s Beige Book repeated its “modest to moderate” mantra, and that about summed up the week. Jobless claims remain quite low.

Next week starts slowly with the Chicago Fed national activity index on Monday and doesn’t really get going until the release of the September new-home sales report on Wednesday. It’s followed by the durable goods report on Thursday morning, followed by the first estimate of third-quarter GDP on Friday morning. Consensus for the latter is at about 2.5%, though that seems high with the New York Fed at 2.2% and the Atlanta Fed at 2.0%. In any case, it will go through several revisions in the next two months and then get tossed out again when the series is rebenchmarked.

Other reports during the week include home price data from the government mortgage database and the private Case-Shiller index, international goods trade on Wednesday and pending home sales on Thursday. We’ll get more regional surveys from Richmond on Tuesday and Kansas City on Thursday.