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.
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