The news out of American Express that loans deemed uncollectible rose less quickly was big for a market that already wants to go higher, for now. While people need to refrain from getting too excited (AMEX uncollectibles rose to 8.8% in March after rising to 8.6% in February and 8.1% in January – these are record highs --and you can be sure CC defaults are going higher as the unemployment rate continues to rise), it’s better than what many had feared – an acceleration in the growth rate of default.
The better-than-expected operating profit results from CSX were largely due to cost cutting, not rising volumes – in fact volumes looked ugly as industrial shipments declined 31% -- but we’ll take what we can get. Besides, cost-cutting is a necessary event in a downturn as it augments profitability when the cycle turns.
Nine of the 10 major industry groups gained ground yesterday, driven by a 5.56% rise in financial shares on the AMEX news – the sector had been down as much as 2.4% early in the session. Technology was the only group that failed to close on the plus side, held down by the prior day’s Intel report one supposes.
Market Activity for April 15, 2009
Consumer Price Index (CPI)
The headline CPI for March fell 0.1% (an increase of 0.1% was expected) and declined on a year-over-year basis for the first time since 1955 – prices as measured by the CPI are down 0.4% since March 2008.
Again, this move was very largely due to declines in the energy and energy-related components. The energy and transportation components (which combined make up nearly 25% of the index) accounted for darn-near all of the downside. Energy prices were down 3.0% in March and transportation fell 1.1%. Food and beverages decline as well, but the unrounded number fell less then 0.1%.
The core rate (which excludes food and energy) rose 0.2% and ticked up just a bit to 1.8% on a year-over-year basis from 1.7% in February.
Core CPI is up 2.4% over the past three months at an annual rate. While this isn’t a troubling increase, it does show that we are not in a deflationary environment and are very likely beginning at a higher base than is usually the case at this point in the business cycle. I understand beating the inflation drum seems premature but we should not ignore the real possibility that when things begin to roll prices could take off in quick order.
The only real drop in the core CPI components was in the lodging away from home item, which fell 2.4% as travel has been hit hard.
Empire Manufacturing
The Empire Manufacturing index (factory activity within the Federal Reserve Bank of New York’s region) showed very nice improvement in April and the first time the index has risen from the depths of deep contraction since the economic world changed in September.
This is the first look at factory activity for April, and if this degree of improvement shows up in the Philly, Chicago and nationwide ISM readings we may just be onto something.
The sub-indices of the report, save the inventory gauge, all shot higher. Again, they remain in contraction mode, but these are moves that can get one excited.
The new orders index bounced by 41 points.
The shipments index jumped 25 points.
Even the employment index showed meaningful improvement, but remained deep in negative territory.
Industrial Production
The Commerce Department reported that industrial production continued to deteriorate in March.. The decline in activity over the past five months has been extremely deep – a level of decline not seen since the end of World War II.
And the declines of the past couple of months cannot be blamed on the beleaguered auto industry as motor vehicle production is up strong over the past two months – industrial production ex-vehicles was down 1.9% in March.
The bulk of the decline came from machinery production, which is not a good sign regarding business spending. The three-month annualized rate of decline deteriorated for this segment, plunging 26.4% vs. a 23.75% decline in the fourth quarter. This aspect of the economy will weight heavily on the first-quarter GDP report, of which we’ll get the first look of on April 29.
We need to see this industrial production number bounce for a couple of month straight in order to have some conviction the economy is on the rebound. We’ll see this show up first in the manufacturing surveys, as the industrial production reading has a bit of a lag to it. Again, the regional factory reports will be key to watch (we get Philly Fed – factory activity for that region – this morning) and as we have talked about many times, the ISM manufacturing figure has to move into the 40s (currently stuck in the mid-30s) to offer signs the business cycle has bounced.
Stock-Index Futures
Stocks are lower in pre-market trading on news that China’s economy grew at the slowest pace in nearly 10 years and U.S. foreclosures rose 24% in the first quarter, although better-than-expected earnings results from JP Morgan has eased the downside a bit.
The China report is kind of old news as we’ve seen signs their economy is bouncing back. Urban fixed-asset investments (plant and equipment, largely) jumped 30% in March and industrial production rose as well. As the Chinese are leaning heavily on their state-owned banking system to provide loans, it’s likely the banking system will have a bad-loan problem as a result (I believe they already mask major banking system problems the way it is) but for now things seem to be bouncing back. Nevertheless, the news of weaker growth last quarter is putting pressure on stocks.
On U.S. foreclosures, one can’t have confidence in saying we’ve seen the peak yet. Foreclosures jumped 17% in March and are 46% higher than a year earlier. The degree of the March increase is a function of the government moratorium on foreclosures coming off.
The bulk of the damage remains in the West – one in every 27 homes in Nevada received a foreclosure notice last quarter and the number was one in every 54 in Arizona. Illinois, Michigan, Florida and Oregon have also been particularly hard hit.
Have a great day!
Brent Vondera, Senior Analyst
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