Last week’s economic data was on the whole better than expected, not that it matters much to a market that twitches with every press report from Europe. Stocks managed a 1% gain after a big rally on Friday in anticipation of a resolution to the European debt crisis. It remains to be seen whether that was the triumph of hope over experience but we’ll find out soon enough.
The week started with another weak report from the NY Fed on manufacturing. The Empire State manufacturing survey came in at -8.48 for the fifth straight monthly contraction. There were some positives with new orders, shipments and employment all on the plus side of the ledger. On the negative side, unfilled orders and inventories contracted while delivery times shortened. By contrast, the Philly Fed survey released later in the week was much more positive at +8.7. New orders, unfilled orders, shipments and employment were all positive. Inventories showed a slight draw. Price pressures eased in both surveys.Industrial production rose 0.2% in September with manufacturing – and autos specifically – showing strength. Manufacturing continues to be the strong part of the economy.
Housing, as everyone knows, has been the weak link in this recovery and the news last week was mixed. The housing market index rose to 18 which is still a long way from healthy but at least off the mat. That’s the highest reading in 18 months. Housing starts also rose, up 15% in September to a rate of 658k units. Most of the gain was in multifamily which is volatile but I don’t want to minimize this report. That pace of starts is up 10.2% from last year and it doesn’t matter to a carpenter whether he swings a hammer at an apartment building or a single family house. Permits were down on the month but up 5.7% from last year. Existing home sales were down 3% but median and average prices continued to fall. I know that sounds like bad news but the sooner prices reach the clearing level the better.
Inflation reports last week were a bit hotter than expected. Producer prices were up 0.8% for the month and 7% year over year. The culprits were food and energy as the core came in at a more tame 0.2% monthly gain. Consumer prices were also up but a more tame 0.3% with food and energy once again the culprits. Core prices rose 0.1% but are now up 2% year over year. In case you’ve forgotten that is the top end of the Fed’s target range for inflation. Based on Janet Yellen’s speech Friday, they don’t care though as she made a case for more QE.
Jobless claims remain stuck around the 400k level but at least they aren’t getting worse. We still see no sign of impending recession and Wall Street’s gurus seem to be coming around to our no recession view which, of course, worries us immensely.
John Chapman has more detailed reports on two of the more important releases of the week, Industrial production and capacity utilization and the LEI. Read them for more details. We’ll be doing more real time analysis going forward so check the blog for updates.
US stocks were up last week and actually broke out technically Friday. While I’d like to say that portends better times ahead, I’m a bit wary of this rally. It has been accompanied by a weaker dollar and rising oil prices which tells me it is just more of the same inflation type of rally we’ve seen since the crisis. I won’t be really excited about a rally until we see stocks and the dollar rising together. REITs also made a big move last week and that also points to inflation expectations as a cause. The market may be starting to price in more Fed easing and while nominal gains are nice, I’d much prefer the real kind. After the recent correction – and considering the potential for more Fed shenanigans – gold is looking interesting. If we don’t get better fiscal policy – and that looks unlikely – we will probably continue to get inflationary monetary policy and that should benefit gold.
We have added risk positions to our portfolios over the last few weeks and have benefited from the rally but we remain very cautious and suspicious of the move. Bonds now appear to be rolling over so we’ve also reduced our fixed income positions somewhat. As Joe Gomez points out in his weekly update, high yield bonds did well and spreads are starting to come in a bit. This looks a lot like previous “risk on” rallies and is therefore likely a temporary phenomenon. We have never been traders but sentiment is still pretty negative so we think this rally has more to go and we will try to participate as fully as our conservative nature will allow.
This might be a volatile week as the European debt situation comes to a climax. There is supposed to be an agreement by Wednesday and if it gets delayed for any reason, markets will react badly. Hang on to your hat – it could be a wild week.
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at jyc3@alhambrapartners.com
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