THE KEY ECONOMIC LANDMARKS WE PASSED
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.
LAST WEEK’S MARKET IN THE REAR-VIEW: “Dip and Rip”
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.
LOOKING THROUGH THE WINDSHIELD
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.