THE KEY ECONOMIC LANDMARKS WE PASSED
1. Retail Sales: -0.3% vs. -0.1% est.
A bit of a bummer report but also not completely unexpected considering sales were up 0.6% in August. Excluding autos, sales were still down -0.2% for the month. A look at Figure 1 shows weakness across many categories, including gasoline stations and clothing stores (back to school shopping over) while electronics/appliances rose a heavy 3.4% (up 5.8% YoY). Fingers were pointed at the timing of the iPhone 6 release, a strong summer buying season for cars, and lower gas prices. The question now is whether we are setting the tone for a disappointing holiday shopping season or “one month does not a new trend make.:”
2. Industrial Production: 1.0% vs. 0.4% est.
After declining in August, industrial production blew past estimates in September.Within the main industry groups, all three were up on the month as shown below.
- Manufacturing 0.5%
- Mining 1.8%
- Utilities 3.9%
Utilities jumped largely in part to a warmer-than-average September which kept A/C’s running while manufacturing got back to its upward trend. On a capacity side, overall utilization rose by six-tenths to 79.3 which stands around a full percentage point below the 40 year average. Manufacturing is 1.4% off from it’s average so there is still plenty of room to go. Much has been said about the relationship between capacity utilization and inflation. At times, there is a higher correlation and pairing between the two and at other times, not as much. Recently, inflation remains muted while utilization is steadily increasing (Figure 2).
3. Housing Starts: 1017K vs. 1008K est.
Housing starts are a choppy a number and while the absolute level gives you some indication of activity, a simple permit or beginning of a build means little. The sales numbers which follow are where attention should rest. For the time being, we’ll say housing continues to move forward and progress past speed bumps.
LAST WEEK’S MARKET IN THE REAR-VIEW: “One, Zero, Decimal, Zero, Percent”
The technical gurus, perma-bears, and others can all finally be satisfied the market “corrected.” Futures reached a high of 2014.3 on September 19th and a low of 1813.5 on Wednesday (SPZ4 – Dec 14 contract) to barely squeak out a 10% down move. Volatility rose sharply to follow the move with the CBOE VIX Index cresting above 30 for the first time since the mess we saw in the fall of 2011. The S&P 500 on a OHLC view made a nearly 100 handle move on Wednesday with the intraday low reaching in the -3% range. Crude oil continues to get slammed with the WTI front month briefly trading a shade below $80. Most analysis pegs profitability for certain types of drilling at $80-85/barrel. We could start to see production coming offline as the oil industry deals with oversupply due in part to the two-headed beast of slowing China demand and improved domestic production (e.g. North Dakota’s shale boom). Treasuries also experienced a wild-ride with the 10 Year falling under a 2% yield. Wednesday was one of those days you put your horse blinders on if you are a long-term investor. These things happen, it is best not to get caught up in the countdown, graphics, talking heads, and other nonsense continually thrown at you from the media. You can read the recent posts from John Eckstein and Rob Stein to get more thought from Astor’s Investment Committee.
LOOKING THROUGH THE WINDSHIELD
As we move into the week before Halloween, the data is light and mostly focused on housing. Existing and new home sales will be the more important releases for the week with a check-in on CPI likely giving further confirmation of inflation running below the Fed target of 2%. Data points like these will be put on the back burner in the near term as attention is directed toward Europe, China, ISIS, Ebola, the Fed, etc. Unless there is a major surprise, do not expect an update on housing to provide ammo for any extended market move.
Will last week prove to be the bottom of the sell-off? Time will tell, but the charts in certain areas of the market look favorable. Small caps are leading the charge from the lows (at the time of writing, nearly a 6% rise from the lows on 10/15). The one concern for me is we get too hot too quick. I would like to see a test of lower levels again before setting up for the next leg higher. I say this statement mostly because I know there are a good number of people who think we are still expensive and want to see period of lower prices. Appeasing the crowd now will lead to a better tomorrow.