Thursday, September 15, 2011

Economic Indicators Update and Some Thoughts to Think About ...

Given that some what we consider as important economic indicators came out, we thought to post our thoughts on them.

No indication of much improvement in the state of employment as initial unemployment claims (seasonally adjusted) for last week were 428K, significantly higher than the Street's 410K estimate and up from the previous week's 411K and . We note that the previous week's figure was adjusted higher by 3K.

On the pricing front, it appears higher prices continue to be passed on to the consumers. CPI came in up 0.4%, higher than the 0.2% expectation. Core CPI was in-line with expectations. However, we note that oil has remained around the $85 - $90 levels. As mentioned before, expectations of further monetary easing policies will likely push commodities higher or limit their downside even on weak economic data. This won't help contain inflation during a pretty much flat economic growth period.

Empire State manufacturing survey results were also disappointing. Overall, it declined to -8.82 from -7.72, not only indicating contraction at a higher rate but also much lower than the Street's -4.0 expectation. New orders dipped slightly as compared to last month. Shipments plummeted. Inventories declined, which could indicate at least some improvement in the coming months. Prices increased, both paid and received. As expected, the index for number of employees dipped to contraction levels (below zero) and to make things worse, the average employee workweek was unchanged and remained negative. The forward looking part of the survey was a bit more positive, although still nothing to write home about. We think we're likely to see some inventory replenishment, but the upside for that will be short-lived. Although most components of the forward looking survey showed some improvement, both the number of employees and average employee workweek indexes declined, which we believe may offset the positive side of the forward looking survey.

According to our great Fed, industrial production increased 0.2%, 20bps higher than the estimates on the Street. Of course, the great Fed did reduce its previously released figures for April, May and June. Capacity utilization was in-line with expectations at 77.4%, which as we've said before remains below growth period average of 80% - 85%.

Based on most of this data, it appears that the state of employment will not improve much.

In terms of the equity market, well, the higher chances of the great Fed (and other central banks) coming to the rescue, as mentioned before, more than offset negative economic news. Last week's volatility pretty much met our expectations. The S&P 500 dipped below its 1,175 - 1,180 support levels; again, the possibility of a QE3 kept it from testing its YTD lows. We must say it did hit the 1,136 level intra-day on 9/13, but then the Chinese came to the rescue as rumors that China would help out Italy brought smiles to everyone's faces.

Gold has been taking a breather (mentioned in Aug) as the dollar, even given further upcoming monetary easing, has become the best of the worst. This is especially true given the troubles that Euro faces and doubts regarding continuing high growth rates in emerging markets. And as the Euro story remains on the front pages, gold might retreat further. In addition, gold, or the GLD ETF, hasn't necessarily filled the gap created when it shot up to $1,900 (or around 186 for GLD) pretty much straight from $1,600 (or around 157 for GLD) in a very short period of time. Once the Fed's QE3 comes back to the front pages, we'll likely see gold gain some strength.

Lastly, we’d like to offer some things to think about. Can Greece really recover and avoid defaulting? If not, does this continuing support from ECB increase the risk of the contagion effect? Can the developed economies and markets continue to ‘kick the can down the road’? Will there be a QE4 after what appears to be a more likely QE3? And will the bickering between the White House and Congress (and within Congress) over another increase in debt limit be as exciting as the most recent one? This is based on the assumption that the new jobs plan will pass, which will likely force the lawmakers to raise the debt limit again. We’re thinking about these, as we’d always like to think that we are thinking.

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