As of 12:00 PM August, 2nd 2016
All of the signs keep pointing in the same direction; it just seems nobody is taking the time to read them. It is like driving too fast on the expressway and missing the exit.
Personal Income came in this morning at +0.2% esimate had been for +0.3%. Consumer spending increased +0.4% vs. estimates of +0.3%. Meanwhile, the PCE Price Index rose +0.9%. All the charts tell a similar tale, and it all comes to the same conclusion. In my opinion, lower rates, weaker dollar and selectively higher equity prices
Many of these economic indicators are reported to us in Month-Over-Month (MOM) terms. However, I like to review them on Year-Over-Year (YOY) terms. Why? It gives me a better sense of the direction the trend. Take a look for yourself.
MOM Personal Income
What can one gather from reviewing the chart above? For me, absolutely nothing.
YOY Personal Income
Not only does the YOY chart look cleaner, but it is easier to understand. The Personal Income picture does not look pretty. It seems to be heading in the wrong direction, and that is not okay for any of us.
Consumer Spending (Personal Consumption Expenditure) YOY
We can see from looking at the Consumer Spending chart, the consumer has been weak and not expanding as much as it has historical. In fact from viewing the graph above the level of spending is growing at levels seen historically in recessions as was the case in 2001 and the early 1990's. That is not to say we are currently in a recession, but given Friday's GDP, we sure aren't too far from one.
PCE Price Index YOY
This chart is disturbing to me; it shows that pace of inflation is slowing. We just continue on this downward trajectory of slowing inflation, which could be sending us on a path to deflation.
Core PCE Price Index (YOY)
Here you see the PCE without Food & Energy, and mostly, inflation has been running at below 2% for quiet some time.
However, there are some investors out there that believe that the Fed should be raising rates? I would strongly disagree with that notion. In fact, I'm not even quite sure what planet these people are living on. My stance since earlier this year, in fact since January, was indeed that the Fed would not only not raise interest rates in 2016, but that we could see QE4.
Weak personal income, spending and signs of disinflation all point to one thing. Lower for even longer. Add to that one of my favorite indicators that come out every quarter the Velocity of MZM.
Velocity of MZM
What does the Velocity of MZM tell us, it tells me interest rates are headed lower as well.
Velocity of MZM vs. the Ten Year Yield
You can see in the chart of Velocity of MZM and the US Treasury the correlation I have written about in the past.
Lower for longer is indeed that name of the name of the game. Which all ties back to what I said to open today's article. Lower rates, weaker US dollar, and selective higher equity. What do I mean by selective, I just mean it is a stock pickers market, higher yield, high growth companies will likely continue to outperform.
The S&P 500 (NYSEARCA:SPY) is off about 17 points to 2154. The index has been unable to muster a move away from that 2165-2170 level range for some time and today we are pulling back.
You can see from the hourly chart above; I have a support line drawn in around this 2150 area. If we break below this level, then I'd think we could move relatively quickly back to that 2120 area.
Not surprisingly the Consumer Discretionary Select SPDR (NYSEARCA:XLY) is leading the market lower, off about 1.5% to 80.53. I had written an article last week the consumer stocks rolling over and from today's data, it would appear we maybe in the beginning phase of this.
The iShare Nasdaq Biotech ETF (NASDAQ:IBB) is down 1.40% to $290. I'd look for support around at the $284-285 level.
- The Dollar Index is lower by 0.63 to 95.09
- The Dollar is weakening to today against the Yen, Euro & Pound
- Yen is approaching $100 level vs. the Dollar
- WTI is up $0.10, and critically holding on $40
- The Ten-year yield is up 5 BPS to 1.54%
- iShares MSCI European Financial (NASDAQ:EUFN) is down 1%
Upcoming Events (From Estimize)
- 8/3 US Change In Oil Inventories -1163k
- 8/3 ADP Change in Non-Farm Payroll +117k
- 8/3 ISM Service Index 56
- 8/4 US Weekly Jobless Claims 264,990
- 8/4 US Manufacturing New Orders -1.46% MOM
- 8/5 Unemployment Rate (U3) 4.8%
- 8/5 Change In Non-Farm Payroll 216k
- 8/5 Average Weekly Earnings 0.23% MOM
Weaker consumer income coupled with weak spending and inflation will cause the Fed to continue it lower for longer policy. This will leading to lower interest rates and a weaker US Dollar, helping commodity prices. Low rates will keep investors reaching for higher yielding equities, and push investors further down the risk spectrum to higher growth companies.
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Have a great rest of the day!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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