The data for September thus far has disappointed. Strong increases in home sales and prices in July, as well as manufacturing in July and August may be dissipating. Orders for durable goods in August disappointed relative to July, as did new and existing home sales. The recent release showing an increase in the Case-Schiller home price index looked encouraging, but market participants should remember that that report was for July, a month for which we saw banner sales. It is likely that Case-Schiller for August will not impress given the slowdown in sales relative to July. While pending home sales for August were strong, given the need for credit approvals it is questionable as to whether many of those sales will come to fruition.
Perhaps the most disturbing data came in the form of manufacturing. I have heard some who are dismissive of the Chicago PMI data. “Chicago PMI isn’t normally a market mover.” Dismissing a dramatic miss in Midwest manufacturing data is a big mistake. The prior month Chicago PMI came in at a break-even 50, indicating no expansion or contraction in manufacturing activity. Consensus expectations were for an increase to 52.0. The actual result came in at 46.1. Perhaps you are saying that the expiration of “cash for clunkers” may be responsible. This is actually not the case, as the cash for clunkers program depleted dealers of the inventory of popular vehicle models and should have necessitated an increase in manufacturing as result of the need to replenish these vehicles. As a result of the Chicago PMI data, I anticipated a miss today for ISM. That is indeed what happened as ISM came in at 52.6 v. a consensus of 54, and 0.3 lower than the August result of 52.9. Now granted an ISM above 50 is indicative of expansion, but it is disturbing to see this metric not increasing on a m/m basis when the argument is for a V-shaped recovery.
Initial claims also missed with 551k v. consensus of 537k. Employment index information contained within the ISM report also resulted in Goldman Sachs revising down their expectation for tomorrow’s September employment report from a job loss of 200k to 250k. While personal spending and income data came in strong for the August report, employment data of this nature is discouraging for future income and spending expectations and may make it hard to argue for any decisive trend of improvement in employment.
Today the markets suffered some pretty strong declines in the wake of September economic data. Technical damage was also done with the S&P ending well below its 20EMA at 1047 and the trendline off the July/September lows at around 1040. Of course we saw a strong downdraft at the beginning of September, and some bulls would argue that this “correction” will be short and shallow and of a similar nature to the beginning of September. I would argue that this time is different due to a fundamental backdrop that looks a little weaker. At the beginning of September all the bears had was an argument that we had gone “too far, too fast,” but now there is some data that suggest that even in the wake of extraordinary stimulus the recovery is slowing. Of course the recovery may be one of fits and starts, but the data from September is certainly not encouraging.
Disclosure: Long SDS, Long QID