Tuesday, October 16, 2012

Economic News Update ...

Industrial production and capacity utilization for September were in-line with the Street's expectations, but slightly below ours. 
  • Industrial production index edged up 40bps to 97.0 in September.  Although the consensus was an increase of only 20bps, the end result was in-line with expectations as the August number was revised down by 20bps.  We note the index remained below 2007 level.
  • Production of consumer goods was unchanged from August as the continuing decline in durables (led by automotive products) was offset by slight turnaround in non-energy nondurables (led by clothing, foods & tobacco). 
  • There were also turnarounds in production of business, and defense & space equipment. 
  • The increase in capacity utilization to 78.3% from August's downwardly revised 78.0% did support the slight improvement we saw in the September NFP.  However, as indicated in this morning's industrial production & capacity utilization report, capacity utilization remains 2% below its long-run average, which is good news and bad news.  The good news is that there may not yet be time for fears of too much inflation.  However, the bad news is that during stable economic growth periods capacity utilization has been between 80.0% and 85.0%, and we are currently far from those levels. 
Headline CPI came in slightly above the Street's expectations.  September CPI increased 0.6% from August, higher than the 0.5% consensus.  Most of the increase was driven by higher gasoline prices.  Core CPI m/m change was only 0.1%, less than the Street's 0.2% estimate.  However, we note that the Y/Y changes for both headline and core CPI were 2.0% in September. 
Surprisingly, there was no upside surprise in the NAHB housing market index.  It came in at 41.0, in-line with expectations.  However, this was the highest level since Jun '06!  In addition, the index increased for the seventh straight month.  While the traffic component of this index continued to increase, its current and future sales measures remained unchanged.  As usual, the homebuilders are blaming "overly tight credit conditions".  The homebuilders' ETF, XHB, is up only 0.3%, trailing the overall equity market.   
S&P 500, which we continue to view as overvalued, is loving the better than expected economic news.  It is up 0.75% at 1451.  And VIX continues to give back last week's gain; down 3.3%.

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