Right before our very eyes we have a social and political war brewing in the USA. As Sheraz Mian pointed out regarding Q2 earnings on 8/24/15, “the proportion of retailers coming out with positive EPS and revenue surprises are tracking significantly below historical periods. In other words, while growth is about in-line with historical periods, but this is weaker than what was expected.” What is in the mix is a steady decline in demographics since 2007 due to an aging population that tends to, other than health care, spend less and less as we get older. Don’t listen to the talking heads, but do pay more attention to the data on earnings. I wouldn’t be surprised to see disappointments offsetting surprises to the upside.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on October 21, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
U.S. Consumer Prices Up 0.3% in September… Energy and housing drove prices higher. Core inflation, excluding food and energy, rose a modest 0.1%.
What it means – Prices increased 1.5% from last year, and core inflation jumped 2.2%. That’s higher than the Fed’s 2.0% target, but they don’t use the Bureau of Labor Statistics’ core consumer price index (CPI). They use the personal consumption expenditure (PCE) report from the Bureau of Economic Analysis. That measure tends to run about half a percent less than core CPI, mostly due to how they weight consumer items.
Even though PCE is lower than CPI, they move in the same direction, so it’s likely that the Fed’s favorite inflation gauge also grew modestly.
The numbers aren’t strong enough to demand a rate hike or weak enough to put a rate hike in question. Whatever people thought before, this number won’t change their minds.
U.S. Industrial Production Rose 0.1% in September… After falling 0.5% in August, production held steady last month. The capacity utilization rate nudged up 0.1% to 75.4%.
What it means – There’s no sign of growth in mining and manufacturing, including autos. Things could turn worse in the months ahead. Ford just announced it will slow production in the face of falling demand for sedans and even its beloved F-150 pickup truck.
The only potential saving grace would be a sudden uptick in fracking, since the measure includes oil exploration and production. But I don’t think that’ll happen in the fourth quarter.
Look for industrial production and capacity utilization to dip in the months ahead.
U.S. Housing Starts Down 9% in September… A plunge in multifamily housing starts accounted for all of the drop. That component fell more than 30%, while single-family starts rose 8%.
What it means – Single-family is the area to watch, since it has the greatest impact on employment. The rise last month shows that homebuilding hasn’t fallen off, but isn’t setting any records, either.
The multifamily drop could be a reaction to falling rents across the country, or simply a normal backlash to the incredible building pace over the last six years.
Existing Home Sales Up 3.2% in September, 0.6% Year-Over Year… The monthly gain surprised the markets, which were expecting a modest gain of 0.6%.
What it means – The monthly gain offsets previous contractions. Existing home sales have bounced between gains and losses since this time last year, making the overall change essentially flat.
We’ve reached a weird equilibrium where prices are high enough to crowd out many buyers, but there’s still enough interest to keep the markets moving.
European Central Bank (ECB) Calls for Curbs on Bitcoin… The central bank issued a legal opinion asking the European Commission to limit the use of virtual currencies, including bitcoin.
What it means – The opinion was blunt. If people use virtual currencies, they might sap the central bank’s control of money. Imagine that. If people are left to decide on their own, they will move awayfrom government oversight and control.
This ruling by the ECB is a shot across the bow.
ECB Holds Monetary Policy Steady, Hints at Longer Bond-Buying Program… ECB President Mario Draghi held a short press conference after the board meeting where he said that December is a natural time frame for the body to announce plans for monetary policy in 2017.
What it means – The idea of the ECB tapering its bond-buying program is officially dead. Not only will the ECB keep buying bonds through at least March of next year, investors expect the central bank to extend the program through June of 2017.
Coupled with expectations of a Fed rate hike in December, this news pushed the euro lower. The continental currency is trading at less than $1.10, edging ever closer to parity. This is a long way from $1.60 in the summer of 2008, or even $1.48 in the summer of 2012. I think the euro will dip below $1.00 long before it rises back to $1.20.
Japanese Investors Snap Up “High Yield” Perpetual CoCo Bonds… Investors can’t get enough perpetual bonds from mega-banks that pay 1% to 2% interest and convert to equity if things go bad.
What it means – I never understood contingent convertible (CoCo) bonds. The idea is that if the company runs into trouble, it can force bondholders to trade their bonds for equity. But if the company’s in trouble, who wants to own stock? And yet, people buy them.
In Japan, investors are pouring into such bonds even though they don’t mature and pay almost no interest. I guess in a land where the central bank has to pledge to keep 10-year government bond interest rates as high as zero, anything is possible.
Next Week – The last week of October will bring reports on new home sales, the S&P CoreLogic Case-Shiller Home Price Index, and durable goods. The big number of the week will be Friday’s announcement of the first estimate of third-quarter U.S. GDP.
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