Weekly Drive: September 22nd to September 26th, 2014


1. Housing:

A mixed basket of data last week for housing on a base level. However, even with the miss from existing home sales, there was a silver lining. The number of all-cash deals fell to 23% and the number of purchases from investors fell to 12%. Homeowners now have a better chance of maneuvering in the market and could find themselves with accepted offers instead of being bulled over by the deep pockets of cash investors. The housing market is starting to get back in balance. It could use help from the labor market (higher wages) and mortgage lenders (easing of standards). The rental market will only cool off when home ownership becomes affordable and viable again for the young professionals in their twenties who still live in mom and dad’s basement.

2. Durable Goods:  -18.2% vs. -18.0% est.

On a headline view, this report looks downright abysmal but then you remember last month was +22.5%. The entire drop was simply transportation coming back to earth after the massive surge in airplane orders (Boeing) in the previous month. Ex transportation, we actually had a really good showing. August was up 0.7% and July was revised higher by 0.3%. Orders and shipments in the “core” group (ex defense, ex air) were both positive and point toward further strength down the line. Unfilled orders and inventories both stand at historic highs for the data series.

3.  Q2 GDP: 4.6% vs. 4.6% est.

Not a lot to say here. The final estimate for Q2 printed in line with expectations and we can finally put to rest the winter drop/spring rebound conversation. The chances of holding a +4% GDP in Q3 and Q4 are slim, but it would be stellar to see a three handle or the high twos. Even if we pull in 2.5% growth for the remaining two quarters, we sit at sub 2% for the year…


On an absolute level, volatility (as measured by the CBOE VIX) is still low in comparison to its historical mean. However, last week we had a 20%+ spike in the index as stocks went on a roller coaster ride. The slope was down all week, even with a mid and end of week bounce. Thursday brought out the sellers in heavy fashion and red was the color of the day. It did not matter what size stock you were, on Thursday it was down, down, down. The S&P 500 and Russell 2000 both ended the day down over 1.5%. The Dow had the largest point drop since July 31st. Most of the downdraft was focused on global growth concerns. The U.S. economy is the shining star right now and thus, the dollar has been heavily bid. Commodities have suffered as a result with crude oil treading water above two-year lows.



The deluge of data begins. With month end numbers and NFP Friday in the mix, I will be busy all week reading econ reports. Expect a lot from me in next week’s post. If I were to pick out two numbers I am focusing on this week, they would be employment within the ISM Manufacturing number and hourly earnings in the employment numbers on Friday. I personally think the United States is working towards a second industrial revolution and will pull workers from overseas back to the mainland. The competition in wages is starting to slim down and technological advances here (think 3D printing) are starting to give us a second wind. Wage growth, as I have said many times before, is important in respect to labor slack.


It looks like the last few days of September are setting the tone for October, generally a month which invokes fears of a crash (you can thank 1987 for that one). Large cap stocks continue to widen the gap between their small cap counterparts. The rally in equities this year has been dominated by large companies. As of Friday, the spread was slightly over 11% with the Russell 2000 negative by nearly 3% for the year. Looking at the table below, you can see the divergence in market breadth. We are strong believers of mean reversion here at Astor. I am sure there is a group of traders out there who see an opportunity to place a spread trade in order to capture the reversion (i.e. Buy Russell, Sell S&P). Then again, there is always risk of a further widening. We have spent the last few years drinking from the Fed Fountain and it has been sweet. Soon we will have to scout for other sources of liquidity (no pun intended).

Market Breadth 929


Calendar - 929-103

World PMI update September – continuing European weakness

  • We began registering concern about Eurozone growth in July and the latest numbers do not ease our concerns. Italy dropped below the 50% growth / contraction line with the August release. France may have stabilized but if so it too is below 50%. The PMI for the Eurozone as a whole is also close to the line suggesting shrinking manufacturing activity and has not increased since April.pmis-2014-09-25.b
  • To highlight the European trends we break them out in a second chart below. This chart reveals that while improvement we saw around the new year seems to have reversed, the Eurozone is not seeing the sorts of deterioration in manufacturing as was seen just 18 months ago. The European bond and currency markets, however, are reacting more dramatically than they did in 2012, perhaps because the ECB seems to be more worried this time.european.pmis.2014-09-25
  • North America seems to be a bright spot. The US has the highest reading overall and Canada and Mexico are both solidly above 50.
  • Asian PMIs are mainly around 50, though Taiwan, enjoying a new high, being an exception. All the new iPhone parts?



In the event, the final numbers were somewhat weaker then first reported.  The updated Eurozone PMIs are repeated below:

Source: Bloomberg, Markit, Astor Calculations

Source: Bloomberg, Markit, Astor Calculations


Weekly Drive: September 15th to September 19th, 2014


1. Industrial Production: -0.1% vs. 0.3% est.

The week started off on a sour note with this disappointing production number. However, looking deeper into the release we get solace from the fact the entire decline was attributed to a drop in the automotive industry. After rising more than 9% in July, motor vehicles and parts fell by a shade greater than 7.5% in August. Excluding auto, production rose 0.1% in July and August. It was merely mean reversion taking course. Certain areas are seeing accelerating demand, such as semiconductors (up 9.9% YoY). In the grand scope of the environment, the report was okay. The decline in automotive was offset by the prior months gains and the continued improvement in other subsections. (Keep in mind Empire Manufacturing was through the roof at 27.54 vs. 15.95 est.)

2. CPI: -0.2% vs. 0.0% est.


A sharp drop in energy prices helped caused the first decline in MoM CPI since April 2013. Gasoline fell 4.1% in August. Core prices (excluding food and energy) were unchanged for the first time since 2010. However, there are signs of inflation slowing moving into the system. As the months move along, the rolling six month CPI on an annualized basis is staying near or above 2% which is the Fed’s target. Expect to see inflation coming through owners’ equivalent rent as the rental market will likely stay hot in the coming quarters.

3. Housing Starts: 956K vs. 1037K est.

Once again we have a disappointing number caused by a prior month spike. Housing starts are always a volatile number and this time around was no different. A 22.9% increase led to a 14.4% decrease. It happens. The trend is still moving in the right direction. The 3/6/12 month moving averages for the numbers of housing units started are look good. While we are no where near the 2000s peak in 2005, we are slowly moving back towards those levels. As always, I am keeping an eye on this data point as well as other housing numbers to see if spring strength stays intact while rates remain subdued.


Coming into the week at month lows, the S&P bounced hard off support in the 1980 range to surge to new record highs. Weak economic data (i.e. industrial production) kept the market muted on Monday but comments from the FOMC in the middle of the week gave reason to buy. The Fed re-iterated it would keep rates low for a “considerable amount of time” which was well received. Disappointing housing numbers on Thursday gave more support for rates to stay low and therefore, asset prices to remain elevated. While the broad market held fairly steady on Monday, growth names took a hit. Tesla (TSLA) took a plunge after a note from Morgan Stanley which led to selling across similar high flying stocks.



The coming week is split between two important segments of the economy: housing and production. If the housing numbers are in line with last week’s releases, there could be chatter about the market slipping. Unless there is a substantial drop in demand, we should see any amount of weakness as simply a market still trying to figure itself out. On the production front, durable goods for August will be hitting the wires on Thursday. The key number will be the nondef ex air report since transportation caused a huge spike last month. Headline estimates are for a -18% drop as orders normalize. Another look at Q2 GDP will round out the week and should cause little market movement. The forecast is for an upward revision.


After a strong week in equities and a divergence between small/large caps widening out on Friday, the picture for this week is probably mixed performance and further focus on the high beta names (story of the year so far). As QE3 purchases reach the end of the line, look out for rate reaction moves in the coming weeks.


Calendar - 922-926

FOMC Quick Reaction

[Before press conference]

There is the danger of inconstancy in the Fed’s communications. On the one hand, the language in the FOMC statement about the “considerable period” is still there, which Chair Yellen described as six months. On the other, the FOMC median expectation for fed funds at the end of 2015, which after all the FOMC controls, is for 1.375%. That rate today is about 0.10%. So that means five 0.25% increases of out eight meetings, which all adds up to the Fed’s projections are implying rates to begin to rise in June of next year. Is that a “considerable” amount of time away?

We hope we get some clarification from the press conference.

[After press conference]

With the animating spirit of Alan Greenspan obfuscating her answers, Chair Yellen allowed the ambiguity noted above to stand. My best guess is that the tension between the “considerable time” formulation and the FOMC consensus opinion on where rates should go will be resolved by how inflation (and the expectations for further inflation) move and how quickly. That is to say, the FOMC is not sure exactly when it will raise rates and wants to maintain freedom of maneuver. Our best guess is that the modest pace of economic growth and residual slack in the economy will allow rates to stay low.

There were some technical details about unwinding QE and normalizing monetary policy. The major change to what we knew before being that rates will rise before the Fed allows a passive reduction in its balance sheet by ceasing to reinvest principal and interest as it is paid.

There was a good question in the press conference about the divergence between fed fund futures and the famous Dot Plot(page 3 of the FOMC Projection Tables report). That is Fund Futures are now implying a funds rate of 0.75% at the end of 2015, while the dot plot says 1.375% One source of divergence is that the Fed is polling its members about the appropriate rate, not the rate which will obtain.


Weekly Drive: September 8th to September 12th, 2014

A little late in posting today, Monday’s can be hectic. Let’s jump right in and have some fun.


1. Retail Sales: 0.6% vs. 0.6% est.

Hello there shopper! We thought you went away. You were just hiding behind revisions it seems. A great August report coupled with an upward revision for July should close the door firmly on the question of spending tailing off. A drop in gas prices (shown best by the -0.8% decline in MoM sales) likely provided fatter wallets to be used at furniture and appliance stores, both of which saw 0.7% increases. Mild weather also probably added to the picture. Usually we all spend August indoors with AC/DC on blast…I mean the A/C. All-in-all, this report leaves me…bum bum bum THUNDERSTRUCK.

2. Consumer Credit: $26B vs. $17.35B est.

Much of the buildup in consumer credit lately has been from the auto sector and student loans. Both areas have at least triggered attention but most likely remain under high alert levels. It all comes down to affordability. As long as consumers are buying within their means, we are on the right track. The default rate has ticked up lately but is still far off from recession highs. Just another data point to keep an eye on. A healthy job market and rising asset prices will likely prevent a larger issue so until the environment flips upside down, there is no need to hit the big red panic button.

LAST WEEK’S MARKET IN THE REAR-VIEW: “Muted consolidation off record highs”

Stocks took a breather last week after hovering around 2,000 for a few days. A bit of worry has crept into the market in regards to the expected rate hike coming in 2015. Anyone else feel like we are waiting for a blockbuster movie? Depending on which side you are on, the tag line is either: “A chilling tale of tightening monetary policy coming to markets in the spring of 2015, The Ratepocalypse!” or “A forbidden relationship between a financial instrument and a recovering economy coming to markets in late-2015, “A Slow Rising Affair.” I digress. It is Monday…sometimes you just need to make yourself laugh a bit. There were actually a multitude of catalysts last week which both gave reason to sell and reason to buy, including Apple’s new devices, further sanctions against Russia, some M&A activity in the food space, excitement about Ali Baba’s IPO, and strong consumer reports. A 1% dip over the course of a week is a shoulder shrug, especially coming off year and decade highs. I’m sure CNBC has a sell-off special report queued up already but ignore the talking heads.



Much of the focus for the week will be on the Fed as QE3 winds down to the last little bit and more guidance (hopefully) is given in regards to rates. Some housing numbers (starts, permits, etc) will show where the state of the market is as we leave the summer season and head into fall. Industrial production already came out and along with capacity utilization, was disappointing. These numbers will be covered next week.


The minor setback in equity prices could see continuation this week based on technical indicators, the Fed, economic numbers, and a whole host of other variables. On the flip side, we could bounce off these levels and provide solid support for the move into the end of the year. Most price targets remain north of 2,000 for the S&P 500 with some near the 2,050 to 2,100 levels. Personally, I think we end comfortably on a 2,000 handle to bring in low double digit returns (assuming dividends re-invested) for 2014.


Calendar - 915-919

FOMC September preview – Beware of a change in forward guidance

When the FOMC meets next week the big question is whether the forward guidance on the future path of interest rates will be confirmed or changed. To refresh your memory, the Fed has been taking two unusual actions over the last few years.   First it has engaged in quantitative easing by buying treasury and MBS bonds in the market. Second it has tried to assure the market that it was not going to raise rates any time soon. As QE winds down next month, minds are turning to the forward guidance.

Forward Guidance

Our guess is that either at this meeting or the one in December, the next two occasions with a press conference from the Chair, will be when forward guidance is adjusted. As of last June’s meeting, the members of the FOMC anticipated Fed Funds rates, currently around 0.1% to rise to around 1% by the end of 2015.   Usually, the Fed likes to move gradually so one plausible path which is consistent with the Fed’s published material, would be to raise rates by 0.15% in the middle of next year, and by 0.25% each of the next three meetings.

This scenario is inconsistent with continuing the FOMC statement which last read “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” What is a considerable period? Chair Yellen said about six months at her last press conference. If we put all the pieces together, they add up to the removing that language from its statement sometime soon. However, last year’s taper tantrum showed that the fixed income market can overreact to Fed intentions.

In sum, the Fed has a communications problem: to let the market know that even considerable periods of time must end while minimizing bond market gyrations. Best to stay alert for market disruption around and after the press conference, next Wednesday, September 17.

Will the fed be aggressive in raising rates?

The Fed still has the substantial policy dilemma we have covered in the past (here and here, for example). We will update here our Dual mandate Report Card showing that the Fed is still in the happy situation where there is no conflict between encouraging the labor market to improve and maintaining price stability.


There is a great deal of discussion, however, about exactly how much slack is in the labor market.   Specifically, how many of the millions of Americans who dropped out of the labor force since the financial crisis can be enticed back in? Aging population means that many workers have retired and are not seeking new jobs. Chair Yellen’s speech in Jackson Hole was not quite as dovish as I had anticipated giving more credence to the idea that a good part of the reduction in the percentage of the population working or looking for a job permanent. See this report by Stephanie Aaronson and her colleagues at the Federal Reserve for one careful study which estimates that only 1/4 to 1 percentage points of the 3 percentage point drop in the labor participation rate will be recovered.

I will agree with Cardiff Garcia (here, for example) that given the low levels of current inflation, the stability of inflation expectations, long-term under shooting of the Fed’s inflation target and a weak global growth environment, the safest thing for the fed to do would be to allow rates to remain low until they can find hard evidence of higher inflation.

 Smart reads to dig into before Wednesday:

    • Tim Duy previews the FOMC
    • SF Fed on the difference between Fed forecasts and the fed fund futures market
    • Gavyn Davies on the stability of the US recovery


– John Eckstein

[Updated September 16]
See also Gavyn Davies take. I agree that changing the “considerable” language in December makes the most sense and that is what I would vote for. I do wonder, however, if Chair Yellen will attempt to prepare the ground for next quarter’s change in this quarter’s press conference.

Weekly Drive: September 2nd to September 5th, 2014

The first week after month end is always full of data. I have a lot to cover.


1. ISM Manufacturing: 59 vs. 57 est.

Another great report from the manufacturing industry. The underlying data sets remain well above the 50 mark which signals continued growth and several saw increases. Notably, new orders boomed to 66.7 and production is now at 64.5. The economic beast is slowly awakening. Additionally, on an inflation note, the prices paid index dropped slightly to 58. A cooling in the index gives the Fed a bit more time, but it still remains relatively high so the timeline could be getting squeezed.

2. Nonfarm Payrolls: 142K vs. 230K est.

And the streak is broken…We are now back under the 200K mark in payrolls. Many had expected a strong showing for manufacturing, however, employment was unchanged. Gains were seen in construction, health care, and services (17K of which was temp). As always, I expect to see revisions for the August number in subsequent releases. If the revisions bump the number up into the 170-200K range, we can consider it to be a minor blip in an overall positive trend. The participation rate fell again to 62.8% as more workers left the work force. Unemployment now stands at 6.1%. There was evidence of wage growth with hourly earnings rising 2.1% YoY.

3. Unit Labor Costs: -0.1% vs. 0.5% est.

Productivity was up 2.3% which was below initial estimates. Growth in manufacturing was much higher at 3.3% while labor costs fell during the quarter. The threat of runaway inflation is just not there yet. I would like to see a pickup in productivity if we expect the economy to continue posting 3-4% growth.

4. ISM Non-Manufacturing: 59.6 vs. 57.7 est.

Not one to be outdone by manufacturing, the services industry also put in a stellar report. Employment moved higher to 57.1, business activity shot up to 65, and new orders fell a bit to 63.8. Services have remained above 50 for nearly six years and do not look to be stopping on the march forward any time soon. As was also seen in the other ISM report, prices paid fell in August but still remain higher. In summary, the future looks bright.

5. Other Items:

The trade deficit narrowed, vehicle sales were much better than anticipated, and factory orders were mostly in line with expectations. I could get more in depth but suffice to say these numbers are further evidence of a economy making strides.

LAST WEEK’S MARKET IN THE REAR-VIEW: “Short Week, Holding Steady”

The S&P 500 is creating a nice little trading range for itself (1995 to 2005). The two main non-domestic influences on stock prices last week were Ukraine and the ECB. Flare ups in Ukraine initially brought out some sellers, but a late week cease fire agreement soothed concerns. The ECB enacted a bond buying program similar to QE in the hopes of boosting activity in the eurozone. Stateside, positive economic news and a disappointing payroll number kept us steady. Traders were adjusting to the end of summer, a short week, and the start of the year end grind.



A little calmer on the economic front this week with focus likely on retail sales after a flat month in July. Traders’ antennae are slightly more alert after the NFP number, but there should not be much worry. A few inventory numbers may give a tad more information for GDP. Although with a 4.2% Q2 print, even a downside revision of 0.5% would likely elicit a shoulder shrug at best.


Can we push higher? Volatility is non-existent and volume should be returning after the summer doldrums. Allow me to talk out of both sides of my mouth for one second. September could be ho-hum or it could get interesting. I personally think there is enough to support higher asset prices, but a trade below 2000 on the S&P every now and then would not be the worst thing to happen.


Calendar - 98-912