Thursday, November 15, 2012

Update and Ind. Production & Capacity Utilization Projections

Well, the equity market (S&P 500) has certainly taken a step back since hitting its intra-day YTD high of 1474 on 9/14.  It has declined more than 8% during the two months since.  Of course it remains significantly above our 12-month target of 1247 (published on 10/8).  Economic and political concerns, both domestic and global, have come out of the hiding.  The 'sugar high' provided by the QE3 announcement didn't last long.  In addition, unfortunately, the Sandy storm has likely created huge long-term economic costs.  In short, the macro story has not changed much from the beginning of the year.
In terms of economic indicators, given that it has been a while since the last time we posted, we will just briefly review some of the numbers that came out this week, followed by our projection of Oct. industrial production and capacity utilization, both of which are due out tomorrow morning.
Oct. headline and core PPI came in significantly below expectations.  However, both increased more than 2% Y/Y.  Oct. retail sales were slightly disappointing, although the miss was due partially to the Sandy.  Excluding auto and gasoline sales, the retail sales monthly growth was negative.  Sept. business inventories (yes, this is data from a while back!) came in above expectations.  Although this data usually lags sales growth, we think the November figure (which we won't see for a while) will not be very strong given the Sandy impact. 
Today's data included the Oct. headline and core CPI, both of which were in-line with estimates.  But similar to the PPI figures, the Y/Y changes were greater than 2%.  Initial jobless claims came in much higher than expected, 439K versus estimates of 376K.  Of course initial claims released last week were much lower than estimates due to Sandy which made it difficult for many to file jobless claims.  Today's jobless claims print was not surprising to us.  As usual, the prior initial claims figure was revised higher. 
Empire manufacturing survey for Nov. was slightly below expectations, -5.2 versus -5.0.  This was surprising as many had expected the worst given impact of Sandy.  Although new orders, backlog, and shipments showed improvement, the employment sub-index took a dump, down to -14.61 in Nov. from -1.08 in Oct.  The average workweek sub-index also dipped further; down to -7.87 from -4.30.  The Philly Fed manufacturing survey, also released this morning, wasn't better.  In fact, it was much worse.  That index came in at -10.7 compared to the 2.5 estimate.  New orders and shipments declined significantly.  There was some improvement in the employment and workweek sub-indices, but both remained in negative territory, and optimism about the next six months has declined a bit. 
As mentioned earlier, Oct. industrial production and capacity utilization will be released tomorrow.  We do not expect to see the full impact of Sandy in those numbers yet.  We estimate slight improvement in both, with 97.3 in industrial production and a capacity utilization of 78.4%, compared with 97.0 and 78.3% in the prior month, respectively.
Lastly, with tensions between Israel and its neighbors increasing, expect commodities, mainly crude oil, to increase a bit.  Normally that might be taken as a positive by the market, but given the weak underlying economy here and elsewhere, higher commodities are not necessarily beneficial, especially in consumer driven economies such as the US'.  If this issue escalates further, China and India can benefit from a competitive standpoint as the US economic sanctions imposed on Iran has allowed the two countries to offer much lower prices for the oil they receive from Iran.  And as we have said before, although it might take a while, the two economies, especially China, are slowly but surely moving towards more consumption. 

Friday, November 2, 2012

Someone Agrees with Us ...

9:55 EDT - Consumer discretionary sector is the strongest in early trading following better-than-expected October jobs report, but headline 171,000 job gain doesn't necessarily suggest consumers are on the verge of a spending spree. They need more cash to spend, but average hourly earnings were down last month, and have only grown 1.6% during the past 12 months, not keeping pace with a 2% y/y rise in consumer prices in September. (        

  (END) Dow Jones Newswires


October NFP Beat Everyone's Expectations

The BLS and its widely followed employment report certainly surprised everyone this morning, especially us.  October NFP print was 171K versus our 110K and the Street's 125K.  It appears we'll need to adjust our NFP model or add a dummy variable to indicate month before the Presidential election.  By the way, the Aug. and Sept. numbers were revised up by a total of 84K.  In fact, the Aug. NFP has been revised up by 96K the last two months!  In Sept. while we had estimated a 145K change in NFP (versus the Street's 113K), maybe we should have included a dummy variable for upcoming QE discussions.  The BLS has found it convenient to revise the Sept. figure to 148K.  The S&P 500 futures is up only 6.0 points, or 0.42%; but gold is taking a beating, down 1.1%.  It appears that part of this upbeat jobs report was priced in yesterday when the market jumped 1%+, or that the market believes this report will up Obama's chances of getting re-elected.  We note that impact of hurricane Sandy will be evident in the November jobs report.
  • The 171K change in NFP included a decline of 13K of jobs in the government sector, resulting in total private NFP change of 184K.  The decline in government jobs was expected as it had suddenly and unusually gained significantly and revised up for three straight months.
  • Big turnarounds compared to the previous month took place in the goods producing sector, led by manufacturing.  Given the regional Fed reports and the ISM, this was very surprising to us.  After losing 14K jobs in Sept., manufacturing added 13K in Oct. 
  • Apparently, the Holiday driven hiring has begun as jobs in retail trade jumped by 36.4K.  This included more than 4K in auto dealers, and  health and personal care stores.  Clothing stores added 3.1K.  However, number of employees in department stores is estimated to have declined by 2K. 
  • The unemployment rate inched up to 7.9% from 7.8% in Sept.  The more important U-6 unemployment rate declined slightly to 14.6% from 14.7%.
  • One of the few negatives in the household survey results included a sizable increase in people being unemployed for more than 27 weeks, +158K. 
  • In addition, the number of people working part-time due to only finding part-time work went up by 42K.  
  • Lastly, while the NFP number came in much better than expected, average weekly hours worked remained unchanged and average hourly wages actually declined by a penny.  This could result in further stagnation of growth in disposable income and possibly have a negative impact on consumption in the future.  We will see if all of the hiring in retail trade will pay off for the employers!

Thursday, November 1, 2012

Oct. ISM Mfg & ADP Beat Expectations; Adjustment to Our NFP Estimate

ISM Mfg (October)
October ISM for manufacturing of 51.7 was above our expectation of 50.0 and slightly higher than the Street's 51.5.  While this figure came in above expectations, it certainly does not indicate much of an uptick in manufacturing activity. 
New orders and production sub-indexes improved.  However, the employment index fell. 
In addition, inventories continued to decline, but some replenishment could follow in November, given increase in new orders.  Increase in inventories in Nov. will likely be subdued given the decline in Oct. backlog of orders sub-index.  We note that both exports and imports fell in Oct.
State of Employment Data & Estimate Revision
Two employment indicators, of which the results were mixed, were also released earlier this morning.  The Challenger job-cut report for Oct. increased to more than 47K, which is the highest level since May and is not necessarily good news.  The ADP employment report came in slightly better than the Street's estimate; 158K vs. the Street's 155K. 
In addition, ADP changed its methodology and is now working with Moody's to provide its estimate of monthly changes in non-farm private payrolls nationwide.  With this new information and the ADP Oct. report, we revised our model which generated a new and higher estimate of change in Oct. NFP.  We now expect that figure to be 110K (significantly higher than our initial projection of 75K), still below the Street's 125K expectations and slightly below last month's 114K.  That number will be announced tomorrow morning by the BLS. 
Market Update
After declining more than 3%, or 45 points, in two weeks, the S&P 500 is welcoming the latest slightly better than expected economic news.  Those numbers are having more of an impact than usual, given the damage and destruction that the hurricane and storm Sandy delivered to the Northeast the last few days.  S&P 500 is up 14.5, or more than 1.0%.  VIX is down 7.1%. 
Given that there must be some rebuilding after destruction, the XHB ETF is up 2.7% this morning and has increased approx. 5.0% since last Friday.  XLY, the consumer discretionary ETF, is also up more than 1.0% today.  We note that while preparation for the storm Sandy drove many to purchase more consumer staples products than usual, those purchases, along with rebuilding costs (in dollar and psychological terms), will likely reduce purchases of consumer cyclical or discretionary products and luxury items during the Holidays.  The XLY ETF could be getting ahead of itself as the Y/Y consumer cyclical purchases during Holiday season may not look that impressive.