Stock futures lower despite fall in U.S. jobless claims


U.S. stock-index futures fell early Thursday, while investors sift through economic data including the weekly jobless benefit claims report, after the stock market posted one of its best daily gains in weeks on Wednesday.

How are equity indexes performing?

Futures for the Dow Jones Industrial Average
YM00,
-0.05%

YMU20,
-0.05%

were off 22 points, or 0.1%, at 29,069; those for the S&P 500 index
ES00,
-0.50%

ESU20,
-0.50%

were off 16.20 points at 3,563, a decline of 0.5%; Nasdaq-100 futures
NQ00,
-1.34%

NQU20,
-1.34%

were down 140.50 points, or 1.1%, at 12,271.

On Wednesday, Dow
DJIA,
+1.58%

surged 454.84 points, or 1.6%, ending at 29,100.50, or 1.5% away from its Feb. 12 closing high of 29,551.42. The S&P 500 index
SPX,
+1.53%

climbed 54.19 points, or 1.5%, to settle at a record 3,580.84, its 22nd record close this year. The Nasdaq Composite Index
COMP,
+0.97%

advanced 116.78 points to close at a record 12,056.44, a gain of 1%, and its 43rd record close of the year.

What’s driving the market?

After a day of records for the S&P 500 and the Nasdaq Composite and the rapid of approach of the Dow to its own record, investors watched U.S. weekly jobless benefits claims data on Thursday morning.

Total new applications for unemployment benefits in the latest weekly period ending in Aug. 30 fell 130,000 to a seasonally adjusted 881,000 or lower than the consensus estimate of 940,000. This comes after the Labor Department said it tweaked its seasonal adjustment method amid the COVID-19 pandemic.

In other data, a revised reading of U.S. second-quarter productivity rose 10.1%, while the trade deficit widened to $63.6 billion.

Read: ADP says private sector added a less-than-expected 428,000 new jobs in August

Investors will also be watching a reading on the purchasing managers index in services from IHS Markit at 9:45 a.m. ET, and a survey by the Institute of Supply Management on activity in the service sector at 10 a.m. ET.

Market participants have been contending with a nearly incessant climb higher, with the focus on remedies for COVID helping to partially buttress the recent run-up. That said, Wednesday’s climb for stocks came even as large-capitalization technology-related stocks staged a pullback that didn’t disrupt the upward momentum of the broader equity market. Tech-related names have led the rebound of the market from coronavirus-lows but some strategists spotted encouraging signs that other areas beyond tech-related names were starting to rise.

“The more broad based this becomes, the more it signals a turning of the tide as far as the economic outlook is concerned, at least among those on Wall Street,” wrote Craig Erlam, senior market analyst at Oanda, in a daily research note.

However, there are concerns that market has climbed too far and too fast and that optimism over a vaccine for coronavirus is misplaced. The Centers for Disease Control and Prevention urged states to speed up approval for vaccine distribution sites by Nov. 1, which is just days before the presidential election.

Meanwhile, doubts about traction for further fiscal stimulus from Washington lawmakers has continued to haunt investors. Investors have been betting on Republicans and Democrats striking a deal later this month to offer additional relief to American consumers and businesses, after talks stalled in August. On Tuesday, House Speaker Nancy Pelosi said Democrats and Republicans still have “serious differences,” following a brief phone call.

Separately, tensions flared up between Beijing and Washington as the Trump administration signaled plans to impose new restrictions on Chinese diplomats in the U.S., citing Beijing’s use of similar measures on American envoys. The Chinese embassy in Washington responded by accusing the U.S. of violating international conventions.

Which stocks are in focus?
  • Michaels Cos. Inc. shares
    MIK,
    -2.34%

    soared 6.7% in premarket trade, after the arts and crafts retailer blew past estimates for the second quarter as stores reopened after being closed during the pandemic.

  • Shares of Sanofi
    SNY,
    +1.06%

    gained 0.4% before the bell after the drugmaker and GlaxoSmithKline
    GSK,
    +2.41%

    said their COVID-19 vaccine candidate has entered a Phase 1/2 clinical trial.

  • Arconic Corp.
    ARNC,
    -0.74%

    said Thursday it restored the salaries and 401K match for all of its U.S. salaried employees, including executives on Sept. 1, after cutting them earlier this year to counter the impact of the coronavirus pandemic.

  • Shares of Designer Brands Inc.
    DBI,
    +6.03%

    plummeted 19% in premarket trading Thursday, after the parent of the DSW Designer Shoe Warehouse retail chain reported a wider-than-expected fiscal second quarter

  • Facebook
    FB,
    +2.39%

    slipped after announcing Thursday it will ban new political ads from running in the week before the Nov. 3 presidential election.

How are other markets trading?

The 10-year Treasury note yield
TMUBMUSD10Y,
0.646%

edged 0.3 basis point higher to 0.653%. Bond prices move inversely to yields.

The ICE U.S. dollar index
DXY,
+0.03%

, which tracks the performance of the greenback against its major rivals, was up 0.2%.

Gold futures
GCZ20,
-0.20%

were down 0.4% to trade at $1,936.80 an ounce, on the New York Mercantile Exchange. U.S. benchmark crude futures
CL.1,
-2.21%

fell 2.2% to a one-month low of $40.61 a barrel.

The Stoxx Europe 600 index
SXXP,
+0.67%

rose 0.4%, while the U.K.’s benchmark FTSE
UKX,
+1.11%

as up 0.5%. In Asia, Hong Kong’s Hang Seng index
HSI,
-0.44%

fell 0.5% and China’s CSI 300
000300,
-0.55%

closed 0.6% lower. The Nikkei
NIK,
+0.93%

rose 0.9%.



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The Fed takes new approach to inflation: What it means for your savings, credit-card interest — and mortgage rate


The Federal Reserve is shaking things up — which is both good and bad news for consumers.

The Fed made some of the biggest changes to its policy in years following an extended review. The central bank has revised its approach to inflation and the labor market in a move that could usher in an extended period of low interest rates.

But the new approach won’t mean that consumers will save money across the board. “The Federal Reserve’s new strategy could divide the landscape for the various financial products important to consumers,” said Lynn Reaser, chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University.

Here’s how the Fed’s new policy will affect Americans’ finances:

What did the Fed change?

The Fed is now officially less concerned about high inflation. Moving forward, central bankers will target inflation that averages 2% over time. This means that following a stretch with low inflation, the Fed might allow inflation to run above 2% for a period of time.

Along these lines, the Fed will concern itself less with the strength of the labor market. “A tight labor market is no longer correlated to inflation,” said Dan Geller, a behavioral economist and founder of consulting firm Analyticom.

In the past, the Fed’s official view was that a strong labor market could cause inflation to jump — as a result, the central bank would move to raise rates even if higher levels of inflation had yet to materialize when the job market was especially strong.

The new policy will allow the Fed to keep rates low even if the job market rebounds and inflation picks up. As a result, some have suggested that it may be many, many years before the central bank hikes rates again.

Americans will save on credit-card interest because of the Fed’s new policy

The good news for any Americans with credit cards is that the annual percentage rate on your cards should go down — or remain low — for the foreseeable future.

“Card APRs are still high, but they’re actually the lowest they’ve been in years, largely thanks to the Fed,” said Matt Schulz, chief credit analyst at LendingTree
TREE,
+2.89%
.
“Their latest announcement means that rates are likely to stay at low levels for some time.”

The same is true for other forms of shorter-term debt, including home equity lines of credit and some personal loans. On short-term loans like these, the bulk of the movement in interest rates is tied to changes in the federal funds rate, which is the interest rate commercial banks used to borrow or lend reserves to each other.

The federal funds rate is the benchmark for these forms of debt. Earlier this year the Fed cut the federal funds rate twice, prompting a drop in interest rates on many forms of consumer debt.

“The Fed isn’t the only factor that affects credit card interest rates, but in recent years, it has definitely been the biggest one,” Schulz said. “The truth is that for most of the last decade, credit card APRs haven’t moved all that much, except for when the Fed raised or lowered rates.”

In the case of credit cards, a lower rate doesn’t necessarily mean an affordable one though. The average credit card APR currently stands at 16.03%, well above the rates seen for other loan products like mortgages or auto loans. That is down from 17.68% a year ago, said CreditCards.com industry analyst Ted Rossman, but it only amounts to $8 a month in savings for someone making minimum payments toward the average credit card debt (which is $5,700 according to the Fed.)

“This is why credit card debtors shouldn’t expect the Fed to ride to their rescue,” Rossman said. “It’s really important to pay down credit card debt as soon as possible, since rates are so high.”

Your savings account may not generate as much income in the future

The interest earned via high-yield savings accounts and certificates of deposit is dependent on the Fed’s interest rate policy. As such, these savings vehicles won’t generate major amounts of interest income so long as the Fed maintains its low rate stance amid low inflation.

If inflation picks up though, banks could move the interest on these accounts higher though, Geller said.

Mortgage rates could actually rise even if the Fed keeps rates low

“Long-term interest rates will be much less affected by this policy change,” Reaser said. And that includes mortgage rates.

Mortgage rates don’t respond directly to moves on the Fed’s part because the Fed only controls short-term interest rates. Instead, the rates on mortgages ebb and flow in response to movements in the long-term bond market, particularly the yield on the 10-year Treasury note
TMUBMUSD10Y,
0.722%

. Therefore, mortgage rates are more subject to the whims of bond investors.

“If investors fear that the Federal Reserve might be too late in responding to any buildup in inflation pressures, long-term rates could be higher,” Reaser said. This logic doesn’t just apply to 30- and 15-year mortgages though, but also to longer-term personal loans and student loans.

The Fed can take certain actions that would keep mortgage rates down though.

“The Fed being more accommodative might mean that they are purchasing more mortgage-backed securities and treasuries which could counter the inflationary effect on the longer rates for things like mortgages,” said Tendayi Kapfidze, chief economist at LendingTree.



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Fed’s new policy may have ushered in a new era of uncertainty on Wall Street


Wall Street is still weighing the implications of the Federal Reserve’s most substantive shift in the way it thinks about monetary policy in years.

In essence, Fed Chairman Jerome Powell on Thursday emphasized the primacy of the labor market in its mandate, even if it means that inflation rises above an annual 2% target that the central bank has traditionally deemed as indicative of a healthy, well-functioning economy.

Powell’s new policy framework comes after 18 months of review by the interest rate setting Federal Open Market Committee and marks a subtle tweak from targeting 2% inflation to now allowing for undershoots and overshoots that would see inflation average 2% over time.

“This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation,” Powell said in his webcast speech as a part of the annual Jackson Hole symposium on Thursday.

Indeed, the shift is a big deal experts say, and not just because of the defenestration of decades of central-bank orthodoxy centered on the relationship between the labor market and price pressures, but because it expresses policy that may be far removed from a policy such as advocated by Stanford University economist John Taylor, who has championed a mathematical approach to setting interest rates

The Fed’s new approach, instead, may raise more questions than answers about implementation and crucially how it achieves inflation targets that have thus far remained elusive over the past decade.

“How much inflation is the Fed comfortable with?” asked Aneta Markowska, chief economist at Jefferies in a Friday research note.

“The FOMC was surprisingly vague with respect to its inflation averaging framework, saying merely that it will aim to achieve inflation ‘moderately above 2 percent for some time’ following periods of undershoots. What does that mean in practical terms? We simply don’t know,” the economist wrote.

After Powell’s Jackson Hole speech, some Fed officials did attempt to provide some sense of the degree to which inflation might be allowed to rise above the central bank’s target before raising alarms.

“To me, it’s not so much the number, whether it’s 2.5% or 3%,” Philadelphia Fed President Patrick Harker, a voting member of the FOMC, told CNBC in a Friday interview. “It’s whether it’s reaching 2%, creeping up to 2.5% or shooting past 2.5%,” he said.

St. Louis Fed President James Bullard, who is not currently a voting FOMC member, said on Friday that inflation could remain at around 2.5% “for quite a while.”

Inflation plays a key role in Fed policy because too-low inflation can lead to a weaker overall economy, as it can encourage consumers, the main driver of the U.S. economy, to delay purchases, as well as amplify expectations for even lower prices, fostering a potentially vicious cycle. As the Fed has put it, “if inflation expectations fall, interest rates would decline too.”

And receding interest rates make it difficult for the Fed to use its main tool for managing monetary policy: the federal funds rate. The Fed lowers its benchmark interest rate to stimulate economic activity and raises it to slow it.

It is worth noting that he Fed has raised interest rates nine times between 2015 and 2018.

However, from at least 2009 prices pressures have been nowhere seen, based on 5-year, 5-year forward inflation break evens, which are at 1.6%. That measure of inflation calculates the expected pace of price increases over the five-year period that begins five years from now.

A lack of clarity on the specifics around its altered policy could inject more uncertainty into the market over the longer term, experts said.

“When it comes to the shift in how the Committee views its inflation objective, much was left unsaid, and careful consideration suggests that the new approach may actually complicate the policy process in terms of both implementation and communication,” Robert Eisenbeis, chief monetary economist at Cumberland Advisors, in a Friday note.

Eisenbeis says that the Fed didn’t immediately specify which inflation measure it would use. Traditionally, the central bank’s preferred inflation gauge, is the PCE price index, or personal-consumption expenditures price index, but the commonly referenced gauge on Wall Street is the CPI, or consumer-price index.

“Finally, the elephant in the room is the fact that the [Fed] has pursued a 2% inflation target since January 25, 2012, but has continually undershot that level,” The Cumberland analysts wrote.

What’s the outlook?

“The Fed will now need to really explore this new regime change in the FOMC meetings, as it is great telling us they plan but how they enact is what the market really needs to learn,” wrote Chris Weston, research analyst at broker Pepperstone.

Lara Rhame, chief U.S. economist at FS Investments, says that the implications of the Fed’s moves may not play out until after this COVID-19 crisis is over.

” The real issue for investors will be what comes after this economic crisis,” the economist wrote.

“Many hope that over the coming year or two, the economy will continue its recovery. This could happen even faster should a vaccine or more effective treatments help suppress the pandemic,” the FS Investments analysts said.

“But [Thursday’s] announcement has made clear that even a return of steady, potential growth would mean the Fed would likely leave rates where they are—at zero,” the economist said.

The Fed’s coming Sept. 15-16 policy meeting may fill in some of the blanks for market participants.

Implications for markets

So what does this all mean for financial markets ?

It implies a regime of potentially lower interest rates but market expectations for volatility may increase, without more guidance on how the Fed’s policy will play out.

In the short term, stocks could continue to rise or at least be inclined to hold steady with the Fed more explicitly indicating no intention to raise interest rates soon.

“One of the few things that could have knocked the market down was the Fed could start to raise rates…I don’t know if this [policy shift] is going to lead to a further meltup, but I certainly thing it does put a more secure foundation under the market,” Brad McMillan, chief investment officer at Commonwealth Financial Network, told MarketWatch.

On Friday, the Dow Jones Industrial Average
DJIA,
+0.56%

closed about 3% from its Feb. 12 record closing high, while the S&P 500
SPX,
+0.67%

and the Nasdaq Composite Index
COMP,
+0.60%

both finished at records.

“It’s hard to bet against the equity market right now,” said David Donabedian, chief investment officer of CIBC Private Wealth Management, in emailed comments.

Commonwealth’s McMillan also said that the growth stocks, which have notably been on a tear, are likely to continue to benefit in the short-term low-interest rate regime. “Future cash flows will be worth more in the present for those companies which can generate it,” he noted.

“Those companies with pricing power, such as commodity stocks, will benefit. Banks will finally enjoy a steepening yield curve. For those without pricing power and thus have to eat rising cost pressures, profit margins will get squeezed and that won’t be a good thing,” wrote Peter Boockvar, chief investment officer, at Bleakley Advisory Group, in a Friday note.

“Cheap stocks, the so called value side, have already inherently built in low expectations so they would be more immune. Interesting times,” he said.

Analysts at BofA Global Research, including Michelle Meyer, said they don’t expect a broad run-up in the U.S. dollar
DXY,
-0.75%

after Powell’s statement.

The analysts wrote in a Thursday report that “a broad USD rally may ultimately be contained absent another bout of risk aversion, as USD shorts have been concentrated in the typically less price-sensitive asset manager community.” 

In theory, a longer-run of lower interest rates and higher inflation should provide support for gold and silver prices, which have already drawn considerable safe-haven flows as investors have fretted about the economic implications of the coronavirus on business activity world-wide.

Gold
GOLD,
+2.45%

and silver
SI00,
-0.01%

to a lesser extent are viewed as hedges against uncertainty and rising inflation. Weakness in the U.S. dollar, or at least a stable greenback, could also help buttress prices for precious metals.



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Home prices continued to rise in June, Case-Shiller index finds — as Americans face a growing affordability crunch


The numbers: Home-price appreciation continued at a steady clip in June as many states began reopening businesses from shutdowns related to the coronavirus pandemic, according to a major price barometer released Tuesday. But recent data suggests price appreciation should gain steam in the latter half of the year.

The S&P CoreLogic Case-Shiller 20-city price index posted a 3.5% year-over-year gain in June, down from 3.6% the previous month. On a monthly basis, the index increased 0.2% between May and June.

What happened: The separate national index released with the report noted a 4.3% increase in home prices across the country over the past year, unchanged from the rate of price growth in May.

Phoenix continued to lead the all other markets nationwide with a 9% annual price gain in May, followed by Seattle with a 6.5% increase and Tampa, Fla., with a 5.9% uptick. “As has been the case for the last several months, prices were particularly strong in the Southeast and West, and comparatively weak in the Midwest and (especially) Northeast,” Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices, wrote in the report.

Overall, the pace of price growth increased in five of the 19 cities Case-Shiller analyzed — the 20-city list again didn’t include Detroit this month because transaction records for Wayne County, Mich., were unavailable, the report noted.

The big picture: Since June, home price growth has only accelerated as buyers’ fervor has been met with a historically-low supply of homes.

Median home list prices rose 10.1% year-over-year for the week ending Aug. 15, according to a recent report from Realtor.com, marking the fastest growth in listing prices since January 2018. It’s a significant turnaround from the start of the pandemic when listing price appreciation slowed to the lowest level since at least 2013, per Realtor.com’s calculations.

Record-low mortgage rates are boosting not only demand among buyers, but home prices as well, since on the surface they expand how much a home buyers can afford to buy. But a recent report from UBS Financial Services questioned how affordable buying a home really is right now.

The report looked at the affordability index put out by the National Association of Realtors. UBS recalculated the index to account for lower down payments (rather than a 20% down payment) and additional costs such as taxes and insurance.

“The vast majority of home buyers buy on monthly payment as opposed to price,” Jonathan Woloshin, a real estate and lodging analyst at UBS, wrote in the report. “However, our concern is that many are only considering the principal and interest component of their monthly payment as opposed to the ‘fully loaded’ monthly payment associated with ownership.”

When the full cost of owning a home is added up, owning a home is a much less affordable proposition. Meanwhile, apartment rents have flattened or declined across much of the country as home prices have continued to rise. Woloshin’s calculations found that it is cheaper to own than rent in one-third of markets nationwide. But that could change. “If rents continue to flatline or decline and home prices continue their upward trajectory of the past several months, renting is likely to become more attractive for a greater number of markets,” he wrote.

Ultimately, if many buyers are priced out, that could throw some cold water on the buying frenzy across the country’s housing market right now.

What they’re saying: “Recently, Case Shiller price metrics have been weakest in Northeastern metros, but there are signs that the economies in these areas are recovering well from the coronavirus. As these economies bounce back, so do their housing markets,” said Danielle Hale, chief economist at Realtor.com.



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Weekly High Frequency Indicators: No Negative Fallout From Termination Of Emergency Unemployment Insurance Yet


Purpose

I look at the high frequency weekly indicators because while they can be very noisy, they provide a good nowcast of the economy and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They are also an excellent way to “mark your beliefs to market.” In general, I go in order of long leading indicators, then short leading indicators, then coincident indicators.

A Note on Methodology

Data is presented in a “just the facts, ma’am” format with a minimum of commentary so that bias is minimized.

Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.

A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.

Where data is seasonally adjusted, generally it is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus I make use of a convention: data is scored neutral if it is less than 1/2 as positive/negative as at its 12-month extreme.

With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there is an additional rule: data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it is scored neutral if it is moving in the right direction and is close to making a new high.

For all series where a graph is available, I have provided a link to where the relevant graph can be found.

Recap of monthly reports

July data included housing permits, starts, and existing home sales, all of which were up sharply. As a result, the index of leading indicators also rose 1.4% and have now rebounded by 1/2 of their total March and April decline.

Note: For many indicators, I have added the week of the worst reading since the coronavirus crisis began in parentheses following this week’s number. The first indication of bottoming will be when these comparisons get “less worse,” and a bottom will probably be in when the comparison improves by about 1/2).

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 3.30%, unchanged w/w (1-yr range: 3.12-5.18)
  • 10-year Treasury bonds 0.63%, down -0.08% w/w (0.54-2.79)
  • Credit spread 2.67%, up +0.08% w/w (1.96-4.31)

(Graph at FRED Graph | FRED | St. Louis Fed)

Yield curve

  • 10 year minus 2 year: +0.49%, down -0.08% w/w (-0.04-0.67)
  • 10 year minus 3 month: +0.54%, up +0.03% w/w (-0.04-0.70)
  • 2 year minus Fed funds: +0.10%, unchanged w/w

(Graph at FRED Graph | FRED | St. Louis Fed)

30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)

  • 3.06%, down -0.08% w/w (2.81-4.63)

Corporate bonds fell to an expansion low late in 2019, but also spiked to near five-year highs early this year. In the past five months, bonds bounced back into positive territory and now have made repeated multi-decade lows.

The spread between corporate bonds and Treasuries turned very negative in March, but has also bounced back significantly. Two of the three measures of the yield curve remain solidly positive, while the Fed funds vs. 2-year spread is neutral. Mortgage rates are also extremely positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps +1% w/w to 311 (184-326) (SA)
  • Purchase apps 4 wk avg. unchanged at 307 (SA)
  • Purchase apps YoY +27% (NSA) (Worst: -35% on 4/18)
  • Purchase apps YoY 4 wk avg. +23% (NSA)
  • Refi apps -5% w/w (SA)

*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted

(Graph here)

Real Estate Loans (from the FRB)

  • Up +0.2% w/w
  • Up +4.4% YoY (2.8-5.2)

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed)

Purchase mortgage applications had been solidly positive in late 2019 and early this year. When the crisis started, they reverted back to negative. Since then, they have rebounded to new decade highs. Refi has also improved from neutral to positive.

With the exception of several weeks in 2019, real estate loans have generally stayed positive for the past several years.

Money supply

M1

  • -1.4% w/w
  • +4.0% m/m
  • +39.3% YoY Real M1 (-0.1 to 40.8)

M2

  • +0.8% w/w
  • -0.1% m/m
  • +22.3% YoY Real M2 (2.0-24.9)

(Graph at FRED Graph | FRED | St. Louis Fed)

In 2019, both M1 and M2 improved from negative to neutral and ultimately positive. Fed actions to combat the economic crash amplified that.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet at p. 24). (No report this week – will resume August 27)

  • Q2 2020 89% actual + 11% estimated up +2.26 to 27.31, down -18.0% q/q, down -36.3% from Q4 2018 peak (as of August 6)

FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. The “neutral” band is +/-3%. I also average the previous two quarters together until at least 100 companies have actually reported.

Q2 earnings, while much worse than Q1, have come in much better than anticipated only a month ago! Nevertheless this metric remains negative. This indicator will return next week.

Credit conditions (from the Chicago Fed) (graph at link)

  • Financial Conditions Index down -0.01 (looser) to -0.53
  • Adjusted Index (removing background economic conditions) down -0.07 (looser) to -0.43
  • Leverage subindex up +0.04 (more tight) to +0.31

The Chicago Fed’s Adjusted Index’s real break-even point is roughly -0.25. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. In early April, all turned negative. In the past four months, there has been a rebound turning both the adjusted and unadjusted indexes at first neutral and now positive.

Short leading indicators

Trade weighted US$

Both measures of the US$ were negative early in 2019. In late summer, both improved to neutral on a YoY basis. The broad measure reverted to negative, but is back to neutral. Against major currencies it has recently fluctuated between positive and neutral. It is very positive this week.

Commodity prices

Bloomberg Commodity Index

  • Up +0.65 to 71.46 (58.87-83.08)
  • Down -7.0% YoY (Worst: -26.0% on April 25)

(Graph at Bloomberg Commodity Index)

Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)

  • 115.60, up +2.33 w/w (88.46-124.03)
  • Up +1.9% YoY (Worst: -23.6% on April 11)

Both industrial metals and the broader commodities indexes declined to very negative into 2019, although there has been a considerable bounce in the past three months. This has been enough to move both of them to neutral, and this week to move industrial metals to positive.

Stock prices S&P 500 (from CNBC) (graph at link)

  • Up +0.7% to 3397.16 (New all-time closing high)

There have been repeated recent three-month highs, and this week all-time highs. Needless to say, this metric is positive.

Regional Fed New Orders Indexes

(*indicates report this week)

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. In April the average was even more negative than at its worst reading of the Great Recession. It rebounded by more than half in May, and at the end of June, it rebounded all the way to positive.

Employment metrics

Initial jobless claims

  • 1,106,000 up +135,000 w/w (Worst: 6.867 M on April 4)
  • 4-week average 1,175,750, down -79,000 w/w (Worst: 5.786 M on April 25)

(Graph at FRED Graph | FRED | St. Louis Fed)

The pace of new claims has slowed to less than 1/7 its record from 17 weeks ago. Continuing claims turned down 13 weeks ago from their worst readings. The employment picture remains much “less awful” than in April. The new pandemic lows one week ago confirm the rating change on this metric back to positive.

Temporary staffing index (from the American Staffing Association) (graph at link)

  • Up +1 to 73 w/w
  • Down -23.4% YoY (Worst: 36.3% on May 28)

This index turned negative in February 2019, worsened in the second half of the year, and plummeted beginning in March. It has gradually been becoming “less awful” over the past three months.

Tax Withholding (from the Dept. of the Treasury)

  • $172.9 B for the last 20 reporting days vs. $185.8 B one year ago, down -$12.9 B or -6.9% (Worst: -16.0% on July 3)

YoY comparisons turned firmly negative in the second week of April. In the past month, they improved considerably, and thus their rating has changed from negative to neutral.

Oil prices and usage (from the E.I.A.)

  • Oil up +$0.10 to $42.27 w/w, down -19.5% YoY
  • Gas prices unchanged at $2.17 w/w, down -$0.43 YoY (Worst: -$1.12 on May 1)
  • Usage 4-week average down -9.9% YoY (Worst: -43.7% on May 1)

(Graphs at This Week In Petroleum Gasoline Section)

At the beginning of this year, prices went higher YoY, but since abruptly turned lower; thus they turned positive. Gas prices remain very low, relatively speaking. Usage turned very negative at the beginning of April, but has since rebounded by much more than half since its low point, and so has become neutral.

Bank lending rates

  • 0.170 TED spread down -0.02 w/w (0.14-1.51) (graph at link)
  • 0.180 LIBOR up +0.02 w/w (0.13-2.50) (graph at link)

Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. After being whipsawed between being positive or negative in 2018 since early 2019 the TED spread remained positive. It briefly turned negative during the worst of the coronavirus downturn, but both TED and LIBOR have declined far enough to turn back positive.

Business formations

Prof. Geoffrey Moore included net formations minus bankruptcies as measured by Dun & Bradstreet among his 11 short leading indicators. The five-week average of this statistic cuts down on most of that noise while retaining at least a short leading signal that appears to turn 1-3 months before the cycle.

This turned negative YoY in March as soon as coronavirus turned into a real issue. But by nine weeks, it had turned back positive.

Coincident indicators

St. Louis FRED Weekly Economic Index

  • Down -0.26 to -5.73 w/w (Worst: -11.48)

Restaurant reservations YoY (from Open Table)

With the reopening of restaurants in some states, the comparisons gradually improved each week through three weeks ago. For one week it was neutral, then for two weeks back to negative, and for the past three weeks rose again to neutral.

Consumer spending

  • Johnson Redbook down -3.1% YoY (Worst:-9.7% June 12)
  • Retail Economist +1.4% w/w, -5.3% YoY (Worst: -27.5% on April 25)

In April the bottom fell out below the Retail Economist reading, followed a few weeks later by Redbook. Because both have rebounded by more than half from their worst YoY reading, both have turned neutral. I am watching these in particular for signs that the cutoff of special unemployment aid at the end of July is having a negative impact – so far, none yet.

Transport

Railroads (from the AAR)

  • Carloads down -15.9% YoY (Worst: -30.2% on May 22)
  • Intermodal units down +1.9% YoY (Worst: -22.4% on May 1)
  • Total loads down -6.9% YoY (Worst: -39.4% on May 8)

(Graph at Railfax Report – North American Rail Freight Traffic Carloading Report)

Shipping transport

Since January 2019 rail has been almost uniformly negative, and worsened beginning late in the year. YoY comparisons worsened in April, but have gotten “less awful” since, and this week intermodal turned positive. Total rail carloads have also improved by more than 50% from their worst readings, so they have turned from negative to neutral.

Harpex made new three-year highs in mid-2019 and remained near those highs until the beginning of this year, before declining to a new one-year low several months ago. It has improved enough to change from negative to neutral. BDI traced a similar trajectory, making new three-year highs into September 2019, then declining to new three-year lows at the beginning of February. Seven weeks ago the BDI improved enough to warrant changing its rating from negative to neutral.

I am wary of reading too much into price indexes like this since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.

Steel production (from the beginning American Iron and Steel Institute)

  • Up +1.7% w/w
  • Down -25.2% YoY (Worst: -39.4% on May 8)

The YoY comparison in production was generally positive early this year, but in March it turned negative again. The bottom fell out in April. There has been slow but continuing improvement in the past nine weeks.

Summary And Conclusion

The nowcast remains the decisive time frame, at its reading is determined by the (lack of) progress against the pandemic.

There were two changes in rating this week, as industrial metals went from neutral to positive, and Redbook consumer spending from negative to neutral. This continues the recent trend to gradual improvement among all the indicators.

Among the coincident indicators, intermodal rail traffic, the unadjusted Chicago Fed Financial Index, the TED spread and LIBOR are all positives. The BDI, Retail Economist consumer spending, total rail loads, restaurant reservations, Harpex and tax withholding are all neutral, joined by Redbook consumer spending. Rail carloads and steel remained negative.

Among the short leading indicators, gas and oil prices, business formations, stock prices, the regional Fed new orders indexes, initial jobless claims, and the US$ against major currencies are positives, joined by industrial commodities. The spread between corporate and Treasury bonds, overall commodities, gas usage, and the broad trade weighted US$ are neutral. Temporary staffing is negative.

Among the long leading indicators, corporate bonds, Treasuries, mortgage rates, two out of three measures of the yield curve, real M1 and real M2, real estate loans, and purchase mortgage applications are all positives, joined this week by mortgage refinancing and the Adjusted Chicago Financial Conditions Index. The 2-year Treasury minus Fed funds yield spread is neutral. Corporate profits and the Chicago Financial Leverage subindex remain negative.

The nowcast remains neutral. The short-term forecast improves to slightly more positive. The long-term forecast continues to improve to even more positive.

Surprisingly, there has not yet been any downturn in the high frequency indicators for consumer spending despite the termination of federal emergency unemployment benefits. Nevertheless, I expect to see an effect on consumer spending shortly. To reiterate my overall outlook, the indicators show that the economy “wants” to improve, but over the next six months, the coronavirus, and the reactions of the Administration, the Congress, and the 50 governors to the virus, are going to be the dispositive concerns.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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