For the week, the DIA’s (DOW) were up 1%, the SPY’s (S&P 500) were up 1.2% and the QQQQ’s (NASDAQ) was down 1%. economic news whipsawed the market all week. The market rallied on Bernanke’s nomination on Monday, sold-off on Tuesday’s consumer confidence number and Thursday’s durable goods report, and rallied on Friday’s GDP report. The markets are still caught between strong economic crosscurrents. The bears are looking at higher interest rates, rising energy costs and the Fed’s concern about inflation, while the bulls are looking at the economies overall resilience, especially in the wake of Katrina and Rita. Neither side has been able to get the upper hand. As a result, the markets are still mired see saw action that probably won’t break until events nullify one side’s perception.
Treasuries gained 17 basis points this week. There were several reasons for the continued sell-off. First, the nomination of Bernanke to head the Federal Reserve spooked traders. They were concerned with a changing of the guard and a concern that Bernanke would accept higher inflation to promote growth in the economy. The GDP report on Friday added fuel to the sell-off, as traders focused on the possibility of further interest rate hikes. Finally, in addition to an information heavy week next week, the Fed meets. The general consensus is they will again raise interest rates. This simply adds to traders concern about the interest rate picture. The Fed has continually raised rates all year, and traders see so reason for that to stop. From a technical perspective, it appears Treasuries are looking for a new trading range above 4.50%, which has been the upper-level of their range for the last 2 years.
Oil was up 2% this week. Although the market was relieved that Wilma spared the gulf oil production, traders focused their attention on a possible demand surge for winter heating products. This concern was responsible for a large move on Tuesday. The import figures helped to calm the markets on Wednesday. The Department of energy reported a 1.5% increase in imports and a 2.2% drop in demand from 1 month ago. Although higher prices are adding to the bear case, the gulf refinery situation provides a strong floor to prices. As of Friday, 68% of gulf oil production and 55% of gulf gas production was still shut-in, meaning it is not working to refine crude oil products. Considering the gulf is responsible for about 30% of US oil production, these numbers are very significant, and gain significance the longer they remain off-line.
The dollar was down 1% versus the euro and near unchanged versus the yen. The currency markets were caught between strong counter-trends this week. On the bulls side were US interest rates which are still higher than other countries and higher US growth. On the bear’s side were technical trading considerations – the dollar is technically over-extended versus both currencies. In addition, there was concern this week about the Bush administrations ability to implement policy considering the scandals currently plaguing the administration. Finally, there is now talk of other Asian and European central banks raising their rates in the near future. While their interest rates are still below US rates, an initial move to tighten their respective monetary policies is the first step to narrowing the US’ interest rate advantage.
Tuesday: Consumer Confidence
The Conference Board Consumer Confidence Index, which had plummeted in September, declined again in October. The Index now stands at 85.0 (1985=100), down from 87.5 in September. The Present Situation Index declined to 108.2 from 110.4. The Expectations Index decreased to 69.5 from 72.3 last month
“Much of the decline in confidence over the past two months can be attributed to the recent hurricanes, pump shock and a weakening labor market,” says Lynn Franco, Director of The Conference Board Consumer Research Center. “Consumers’ assessment of current conditions, however, remains above readings a year ago, but their short-term expectations are significantly below last October’s level. This degree of pessimism, in conjunction with the anticipation of much higher home heating bills this winter, may take some cheer out of the upcoming holiday season. In order to avoid a blue Christmas, retailers will need to lure shoppers with sales and discounts.
The hurricanes created a confusing situation for Americans. Their overall effect is still negative, although not as large as after the disaster. In addition, as high heating bills come in, this index is likely to drop further. Various media reports place the possible hearing price spike in the range of 50-90%, which could be large enough to damper holiday shopping for low and middle-income consumers.
Tuesday: Existing Home Sales
The National Association of Realtors issues this report by projecting the total number of units sold on an annual basis. This month’s projection increased .3% from last months, from 2,841,000 to 2,849,000. The annual projection is still for 7.28 million units. The inventory levels remained the same, with 4.7 months of inventory available for sale given current demand. Although the inventory number did not increase, it steadily increased from March through August. In addition, September’s inventory number was 19.6% higher than last years. Finally, the South was the only region where sales meaningfully increased; Sales in the south increased 3.7%. The Northeast increased .8%, while the West dropped 4.1% and the Midwest dropped 3%.
Tuesday: Richmond Federal Reserve Manufacturing Survey.
In October, the seasonally adjusted manufacturing index, our broadest measure of manufacturing activity, increased to 12 from September’s reading of 8. Among the index’s components, shipments were little changed at 14, and new orders moved up seven points to 15. Turning to manufacturing job growth, the employment index strengthened, gaining five points to 5.
Most other indicators also strengthened. The orders backlogs indicator jumped twelve points to 2. Reflecting stronger demand, vendor lead-time added nine points to 19. In contrast, the capacity utilization index grew more slowly, inching down four points to 4 and indicators for both raw materials and finished goods inventories were lower. The finished goods inventories index fell eight points to 13, and the raw materials inventories moved down six points to 5.
In October, District manufacturers reported that the prices they paid increased at an average annual rate of 3.87 percent compared to September’s reading of 2.11 percent–the biggest increase since March 1995. Respondents indicated that raw material prices were “skyrocketing”–especially prices for steel, oil, petroleum based products, gas, electrical power, and lumber. Finished goods prices rose at a 1.82 percent pace compared to a 0.74 percent rate reported last month. Looking towards the next six months, respondents expected input prices to increase at a 4.39 percent pace–the largest increase in the history of our survey–compared to September’s 3.87 percent reading. In addition, contacts looked for finished goods prices to advance at a 3.25 percent annual pace–also the largest increase since the beginning of the survey–compared to last month’s 1.71 percent rate.
While the strength in the manufacturing sector is good news, the prices paid component again showed an increase. This is consistent with all other Fed surveys, which have unanimously reported sharp price increases. In addition, the magnitude of this surveys increases – the largest in 10 years and the largest on record – may indicate the Fed’s course of rate hikes will continue beyond the first of the year.
Tuesday: Richmond Federal Reserve Services Survey
Revenue growth in the service sector quickened somewhat in October, while firms added workers at September’s pace. The overall revenues index rose to 25 compared to September’s 21. At 7, the index for employment slipped one point below its previous reading. However, the index for wage growth remained at 21 – equal to the September measure.
Survey respondents were generally optimistic regarding their outlook for the six months ahead. The index for expected demand in the broad service sector gained 3 points, to 38.
Overall service sector price growth moved higher again in October, at an annualized rate of 2.12 percent compared to 1.40 percent in September. Retail prices rose at a 2.64 percent pace in October, following last month’s 1.91 percent rate. At services firms, prices grew by 1.74 percent for the month, following a 1.21 percent rate in September.
Survey respondents anticipated increased price pressures in the next six months. They looked for overall sector prices to rise by 2.88 percent, versus last month’s expectation for 2.32 percent growth. Retailers expected prices to move up by 2.65 percent, compared to September’s outlook for a 2.40 percent rise. Service producers anticipated a 2.83 percent rate of price growth, compared to their expectation in September for 2.22 percent.
As with the Richmond manufacturing survey, the overall conditions of the retail sector are positive. However, the price measures are cause for concern. The chart available with the report indicates price spikes are moving to their highest level in over 2 years. In addition, retailers are expecting higher prices over the next 6 months. This indicates – again – that the Federal Reserve may continue its pace of rate increases beyond the first of the year.
Thursday: Durable Goods
New orders for manufactured durable goods in September decreased $4.4 billion or 2.1 percent to $207.0 billion, the U.S. Census Bureau announced today. This followed a 3.8 percent August increase
Looking at the numbers, the primary declines came from the computer and technology sectors: new orders for computers dropped 6.8%, new orders for communication equipment fell 5.8%, and new orders for electrical equipment fell 3.5%. The general interpretation of this report was business is taking a “wait and see” approach to orders. Also important is last months durable goods orders were up. It is possible business wants to put its latest orders to use before making further monetary commitments.
Friday: GDP
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.8 percent in the third quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.3 percent.
The Bureau emphasized that the third-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The third-quarter “preliminary” estimates, based on more comprehensive data, will be released on November 30, 2005.
The major contributors to the increase in real GDP in the third quarter were personal consumption expenditures (PCE), equipment and software, federal government spending, and residential fixed investment. The contributions of these components were partly offset by a negative contribution from private inventory investment.
The acceleration in real GDP growth in the third quarter primarily reflected a smaller decrease in private inventory investment and accelerations in PCE and in federal government spending that were partly offset by decelerations in exports, in residential fixed investment, and in state and local government spending.
This was a solid report, and it lead to a strong rally on Friday. These numbers include Katrina and Rita, adding more importance to the strength of the numbers.
There are a few interesting details in this report. First, the motor vehicles and parts doubled from 11% of personal consumption expenditures to 22% of PCE. The major auto companies have stopped their employee pricing promotion, indicating most consumers were taking advantage of the pricing while they could. Household operations increased as well, although they comprise 2% of PCE. It does appear that energy costs are starting to increase in importance and impact. Inventories decreased as well, although the reason for this is most likely seasonal as retailers clear out summer stock and get ready for the holidays. Federal spending increased as well and was responsible for 13% of this months increase. This should not surprise anybody because of the government spending from the hurricanes.
