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    "Emotional roller coasters tend to emphasize the lows, tend to be more affected by the low, by the dip in an emotional roller coaster than when you are at the peak."

    -Rush Limbaugh

    A whole slew of positive economic releases in the morning hours are keeping the rally alive, this afternoon. It's a very rare session as all three major equity indices managed to hit new intraday highs in the same day: the S&P 500 and the Dow Jones Industrial Average both hit new all-time highs, while the NASDAQ reached a new 14-year high. While the Fed's decision to raise rates still looms in the minds of investors, that dark-cloud remains far off in the distance. In fact, the most recent market dip caused by geopolitical concerns does not appear to amount to much in hindsight when you take a look at this one-year chart:

    As for economic releases, we can first look at the S&P Case-Shiller report. The S&P Case-Shiller 20-city adjusted index showed that home price appreciation is continuing to unwind after a seasonally-adjusted 0.2% decline in June following a 0.3% decline in May. However, year-over-year, the adjusted rate of the composite reading (shown in the chart below) is up 8.1% compared to a 9.3% gain in May. On a monthly basis, there were declines in 13 of the index's 20 cities, with Minneapolis, Detroit, Atlanta and Chicago showing particular weakness. The unadjusted data shows a monthly gain of 1.0% which reflects the relative strength of summer months for sales. However, the year-on-year rate, where this effect is generally offset, tells exactly the same story as the adjusted data: +8.1% in June, versus +9.3% in May. Ultimately, home prices are weakening, and this is also supported by yesterday's new home sales report as well as last week's existing home sales report. The decline in prices is great for buyers, but remain bad for sellers.

    Next, the Conference Board's measurement of consumer confidence is higher, and is led by strength in the current assessment component. Consumer confidence rose to a new recovery high of 92.4 and reflects a 6.7-point surge in the present situation component to 94.6. The gain in the current assessment component points to improvement in employment during the month of August, with substantially more consumers believing that jobs are plentiful (18.2% in August, versus 15.6% in July). Also, fewer consumers are saying that jobs are currently hard to get, at 30.6% compared to last month's 30.9%. The expectations component (indicated in the chart below) is a comparatively vague component: it reflects the long-term outlook for jobs and income. Another noteworthy detail is a gain in home and auto buying plans, and a minimal uptick in 12-month inflation expectations to 5.5%. All-in-all, the report itself is very positive and underscored that there is substantial improvement in jobless claims. The job market outlook is the main component driving confidence, and this is a very healthy sign.

    Lastly, not a major market mover, but worth-noting, is the major improvement in the Richmond Fed's manufacturing report. Regional Fed reports lately have been pointing to slowing this month for the manufacturing sector, but not the Richmond where the index is up a solid 5 points to 12. Order data led the report with new orders up a very strong 8 points to 13 and backlog orders jumped to 15 vs July's reading of zero. This report ought to help offset the slowdown in manufacturing seen in the Philly Fed, Empire State, and Dallas Fed reports. The general strength is also underscored in the durable goods report from this morning.

    Aug 26 2:11 PM | Link | Comment!
  • TO 2K AND BEYOND - Jennifer Coombs

    It's indeed a very good commencement to the week! The major US equity markets are enjoying a great rally today with the S&P 500 finally crossing above the 2,000-level for the first time in history. Most notably today, the index was lifted due to a round of corporate deals and optimism that the European Central Bank would start doing more to stimulate the European economy. It is quite a heavy day of economic releases, although none in particular (save homebuilders) are drastically impacted on a microeconomic level.

    Firstly, the Chicago Fed National Activity Index came in at a reading of 0.39 in July, compared to a revised 0.21 in June, which points to some definitive pickup in economic activity. Also worth noting is the fact that the 3-month average, at 0.25 versus June's revised 0.16, is over breakeven zero for a fifth month in a row. Three of the four major index components were positive for July, most notably the production indicator reflects strength in manufacturing. Employment also improved thanks to the dip in jobless claims helping to offset the slight increase in the unemployment rate.

    Next, Markit's flash reading of the Services PMI showed that growth in the US service sector remains strong, but has moderated in August to 58.5 versus the whopping 61.0 in both the readings for final and mid-month flash reading in July. Service businesses reported strength in both household and business clients, as new business remains strong. The employment component of the index is higher, but only slightly, though the general market outlook is very strong.

    The biggest market downer for the day was the July reading for new home sales. Upward revisions to the home sales from June (to 422,000 from an initial reading of 406,000) should have been enough to offset a lower-than-expected 412,000 annual sales rate for new home sales in July, but the homebuilding group did not react positively. Overall, the two prior months revised higher by a total of 28,000 units. July's gain was centered entirely in the Southern US, which rose 8.1%, and it is by far the largest region for new home sales, outdistancing all other regions combined. There certainly is no lack in market of new homes as supply increased to 205,000 units from 197,000 in June, which pulled the monthly supply sales rate up to 6.0 months from 5.6 in June. Part of the reason new home sales were struggling in recent years was pricing concerns, but it appears that these concerns are slightly easing. The median price of a new home fell 3.7% in July to $269,800. Year-over-year, the median price is up only 2.9%, which is well below the year-over-year sales gain of 12.3%. Overall, despite the soft headline number, concentrated gains in the South and better pricing are pointing to a slow, but sure recovery in the housing sector.

    The home builder's index did not take to kindly to the lower than expected delivery of sales during the month of June. Notice the steep decline in the index moments after the Census Bureau released housing data.

    Aug 25 3:44 PM | Link | Comment!

    As expected, the major equity indices traded roughly flat until Fed Chair Janet Yellen began speaking at 10AM. All then proceeded to take a dip lower, but it was no swan dive, so there is not much panic among investors. The unemployment rate alone is not enough to evaluate the strength of the U.S. job market. In defense of her dovish policy approach, Yellen said that the U.S. labor markets remain hampered by the effects of the Great Recession and the Federal Reserve should move cautiously in determining when interest rates should rise. The Fed has held benchmark rates near zero since December 2008, and has said it would wait a "considerable time" after winding down a stimulative bond-buying program in October before raising them. Financial markets currently expect rates to rise around the middle of next year. However, she noted that the unemployment rate alone is not an adequate measurement of economic recovery as there are still millions of workers who are stuck in part time jobs and are out of the job market altogether. Serious strength in the job market will be needed to determine the appropriate timing of raising interest rates, but for the moment the market remains unfazed. While the U.S. economy continues to press on with its rate dilemma, on the other side of the world, conditions are not looking great for China.


    This week, HSBC's flash reading for the Chinese Manufacturing Purchasing Managers' Index (PMI) was incredibly discouraging. The August reading came in at 50.3 and was way below all economists' estimates (at an average of 51.5), and a big drop from the final July reading of 51.7. We note that a reading below 50 is indicative of economic contraction while a reading above 50 indicates expansion; however a reading at 50 indicates no change. Ultimately this reading shows that activity is slowing to levels comparable to the start of the year. Stocks declined in China after this report, and coupled with a slump in credit expansion and a slowdown in investment spending, this points to the very likely scenario that the Chinese government will up its stimulus activity. In a year that China is expecting a whopping 7.5% GDP growth rate, most economists around the globe are expecting 2014 to be the weakest year in the Chinese economy since 1990. The flash PMI is typically based on 85% to 90% of responses to surveys sent to purchasing managers at more than 420 companies, but the final reading will be released on September 1st. It's important to note that HSBC is a private research entity and the final reading, released by the Chinese government, ought to give the impression that the manufacturing situation is not as dire as economists are letting on. Whether through fudging the numbers or through an industrial stimulus: there is likely a much more sinister story behind China's economic reality.


    Aug 22 1:56 PM | Link | Comment!
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