Hard Data Versus Soft Sentiment
Markets across the globe are still calling out for bold, coordinated policy actions here and abroad as participants await earnings results and guidance from Corporate America and another set of economic data for August and September in the United States. On the plus side, policymakers in Europe seem to be getting the market’s message, and there were signs over the weekend of September 23 – 25 that some type of bold response from Europe was in the works. In addition, the European Central Bank (ECB) hinted last week that it may cut rates at its next meeting in early October. Also, euro-zone officials are talking openly about recapitalizing European banks most exposed to the debt of Greece and other troubled peripheral European nations, similar to the United States’ Troubled Asset Relief Program (TARP). On the downside, Congress continues to bicker over funding the government for fiscal year 2012 (which begins on Saturday, October 1), the incoming economic data remains tepid, and despite the talk of coordinated policy action on Europe, none has been taken.
Policy Likely To Trump Corporate and Economic Data Again This Week
While there are a number of key economic reports due out in the United States and overseas this week, policy (or lack thereof) is likely to continue to dominate the headlines and drive financial markets. Although no key developed or emerging market central banks are scheduled to meet this week to discuss policy, there are a number of central bankers on the docket this week, including Federal Reserve (Fed) Chairman Ben Bernanke. Bernanke is slated to deliver a speech in Cleveland, OH, and there ten other speeches by Fed officials this week. Central officials from the ECB, Bank of England (BOE) and Bank of Canada are all slated to make speeches this week as well.
As we have been noting for several weeks in the Weekly Economic Commentary, central banks that had been tightening policy over the past two years or so have either stopped raising rates, or begun to cut rates, as inflation risks fade amid a sharp slowdown in economic activity and prospects for future growth wane. Examples in this group include the central banks in Brazil, Russia, New Zealand, and Australia, as well as the ECB. Israel, which has been raising rates since mid-2009, unexpectedly cut its overnight lending rate on Monday, September 26. Most notably, China’s central bank has hinted in recent weeks that it is close to the end of its rate hike regime. Meanwhile, central banks that have been cutting rates are looking to do more. Examples here include the Fed, the BOE and the Bank of Japan.
Both corporate and economic data will compete with policy for the market’s attention this week. The corporate earnings preannouncement season remains in full swing as company managements continue to quantify the impact of the ongoing uncertainty in the global economy on corporate sales and earnings. Thus far, corporate managements have not guided Wall Street analysts’ expectations down much despite the sizeable drop in stock prices. That may change in the coming weeks and months, as companies report their earnings for the third quarter of 2011, and provide outlooks for the fourth quarter of 2011 and beyond. These preannouncements are likely to garner less attention than the ongoing policy wrangling, but are likely to move markets more than this week’s batch of economic data.
Given the recent financial market and policy turmoil at home and across the globe, we continue to prefer using actual data (the number of vehicles produced, the tons of steel manufactured, the number of homes sold, the amount of new orders for capital goods, how many dollars consumers spent, what actions central banks are taking, etc.) rather than sentiment data (that measures how consumers or business owners feel about the current situation or the prospects for future activity). The September 6, 2011 edition of the Weekly Market Commentary explores this difference in depth.
This week's economic reports are roughly split between sentiment indicators (September reports on consumer sentiment and several regional Federal Reserve manufacturing reports for September) and “hard data” indicators (initial claims, weekly retail sales, durable goods orders and shipments, new home sales and personal income and spending).
Despite the nation’s dour mood and unprecedented turmoil and volatility in financial markets, the sentiment data released thus far in September including the:
· Philadelphia Fed Manufacturing Index,
· Dallas Fed Manufacturing Index,
· Empire State Manufacturing Index,
· University of Michigan’ Consumer sentiment,
· National Federation of Independent Business’ Small Business Optimism Index
· National Association of Homebuilders Sentiment Index
have painted a picture of an economy that is weakening, but not dramatically so. Nearly all of the indicators in the list above remain solidly above their 2007 – 2009 Great Recession lows, although several are flashing recessionary signals.
On the other hand, much of the hard data we have seen for August and September continues to suggest that the economy can avoid a recession, but that slow growth is the most likely outcome.
Initial claims for unemployment insurance remain near 400,000 per week, a level that historically has suggested slow, but positive job growth.
· Industrial production in the United States increased by 0.2% month-over-month in August and was running 3.4% ahead of year-ago readings. Although industrial production remains below its pre-recession peaks, it was at a three-year high in August.
· At 231,557 units, auto and light truck production in the latest week (September 19 – 23) was the highest for any week since mid-2008, before the onset of the worst of the Great Recession in the fall of 2008 following the collapse of Lehman Brothers.
· Weekly retail sales, a component of the LPL Financial Research Current Conditions Index, was running 3.4% ahead of a year-ago in the week ending September 17, a level consistent with the pace of economic growth and consumer spending seen during the 2002-2007 economic recovery in the United States.
· At 1.9 million tons, steel production in the latest week was nearly 10% above year-ago levels. While still below the two million tons per week average seen in the 2002 – 2007 economic recovery, steel production is at its highest level since mid-2008.
· Production of lumber (479,000 board feet) was running 34% above year-ago levels last week and, while not yet back to pre-recession levels, is at its highest level since mid-2008.
· Total demand for petroleum products (gasoline for auto and truck use, diesel fuel for heavy truck and railroad use, and jet fuel for passenger and cargo jet traffic use), as measured in the U.S. Energy Department’s Weekly Petroleum Status Report, was running at more than 19 million barrels per day. That reading is little changed from the demand seen a year ago, and more than two million barrels per day more than in late 2008/early 2009, the worst of the 2007 – 2009 Great Recession.
The sentiment and data continue to tell two different stories about the economy. The sentiment is flashing “recession” and worse, while the data continues to tell a story of a struggling economy, but one that is growing slowly, not collapsing.
As we have noted in our recent commentaries, the U.S. economy remains fragile and vulnerable to an exogenous shock (i.e. an oil price spike, a massive natural disaster, large-scale terror attack, 2008-style credit crunch, etc.) and to policy mistakes, both at home and abroad. However, our forecast remains that the economy will continue to sputter along, with growth in the third quarter better than the second quarter, due to a rebound in auto production and auto sales.
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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
Stock investing involves risk including loss of principal.
Philadelphia Federal Index is a regional federal-reserve-bank index measuring changes in business growth. The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction.
The NY Empire State Index is a seasonally-adjusted index that tracks the results of the Empire State Manufacturing Survey. The survey is distributed to roughly 175 manufacturing executives and asks questions intended to gauge both the current sentiment of the executives and their six-month outlook on the sector.
The University of Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.
The Texas Leading Index is a single summary statistic that sheds light on the future of the state's economy. It is designed to signal the likelihood of the Texas economy’s transition from expansion to recession or vise versa. The index is a composite of eight leading indicators—those that tend to change direction before the overall economy does. These indicators include: Texas Value of the Dollar, U.S. Leading Index, Real oil prices, Well permits, Initial claims for unemployment insurance, Texas Stock Index, Help-wanted advertising, Average weekly hours worked in manufacturing.
The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.
International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.
The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of ten seasonally adjusted components based on questions on the following: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job opening, expected credit conditions, now a good time to expand, and earnings trend.
National Association of Homebuilders Sentiment Index is an index of more than 300 home building companies measuring demand for the construction of new homes. The housing market index goes from 0 to 100, with a measure over 50 meaning that demand for new homes is rising.
This research material has been prepared by LPL Financial.
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