U.S. stocks kept the dream alive, as the S&P 500 pushed above the 1050 mark for the first time since it slid through that number on October 7, 2008 – this puts the broad market higher by 58% from the March 9 low without more than a 7% pullback in June/July; the clock is ticking. The timing of these things is impossible to get exactly right. I’ve expected a correction since 900 on the S&P 500, but it will come so be prepared for it.
The market got its juice yesterday via a robust August retail sales report and New York-area manufacturing that showed additional advances into expansion territory. We’ll get to both of these reports below but I’ll just quickly point out that one-time clunker cash and a price-driven jump in gasoline sales accounted for 85% of the advance in total retail sales – that doesn’t sound sustainable to me, even forgetting about labor-market and household balance sheet conditions.
Commodity-related basic material shares along with the industrial sector led the advance. The S&P 500 index that tracks basic material shares has jumped 76% since the March lows; the index that tracks industrials is up 77% since the rally began.
Volume picked up yesterday as 1.45 billion shares traded in the NYSE Composite, just about in line with the longer-term average.
Market Activity for September 15, 2009
Retail Sales
The Commerce Department reported that retail sales jumped 2.7% in August (exceeding an expected increase of 1.9%) after a downwardly revised 0.2% decline for July. Factoring out the clunker-cash driven sales, ex-autos retail activity rose a strong 1.1% last month on back-to-school buying and the sales tax holiday. (Retail sales were lower by 5.3% from August 2008. This figure is adjusted for seasonal variations but not for price.)
However, adjust for the spikes in auto and gas station receipts and retail sales rose just 0.6% -- still a good number but considerably lower than the headline print.
The clunker cash fueled a huge 10.6% explosion in auto-related sales (vehicles and parts) and undoubtedly borrows these sales from the future. Much like the first-time homebuyers tax credit does with regard to the housing market, but that’s another story. The nearly 11% surge in auto-related sales is the biggest monthly increase since automakers offered zero-percent financing in October 2001 following the 9/11 attacks. Autos and parts made up 18.3% of total sales, which means it accounted for 70% of the month’s jump.
Gas station receipts jumped 5.1%, even as demand was soft, as wholesales gasoline rose 11% in August.
Back-to-school purchases also helped the overall retail figures as clothing sales were up a big 2.4% in August, general merchandise was up 1.6%, sporting goods and book sales (part of the same segment) climbed 2.3%, and electronics were up 1.1%.
The drags on retail sales were housing-related components as building materials fell 1.2% and furniture sales dropped 1.6%.
The core retail sales figure (excludes building materials, gasoline and autos, and is the figure that flows directing into the personal consumption component of GDP -- these exclusions are picked up by GDP in other ways) rose 0.7%. This more than offsets July’s 0.3% decline, so the third-quarter consumption figure is off to a decent start.
The concern is how the market reacts to ensuing retail figures as the next couple of months will not get help from auto-related clunker subsidies – it will be interesting to watch how the holiday shopping season turns out. The consumer has slowed the reduction in household debt levels as result of the clunker program and the reality is this has to be worked down in the face of stagnant-to-low wage data and an unemployment rate that will reach double digits.
(I should note, in terms of incomes and the household balance sheet: As a few people have pointed out over the past couple of months, and Barry Ritholz has most recently, the decline in personal incomes over the past 15 months can be repaired by the Fed juicing the stock market – household balance sheets are certainly in better shape now after this 55% surge from the bottom. How does the Fed juice the stock market? Well, they push short term rates to zero, which means banks have virtually no borrowing cost and can simply invest in longer-term Treasury securities and make a 340-400 basis point spread. The income from this trade can be invested in the stock market, which has surely occurred, and voila, you’ve got balance sheet repair. Of course, there comes a time when this music stops, which has been my concern as everyone knows, but for now it is working.)
Producer Prices Index (PPI)
The Labor Department reported that producer prices rose 1.7% in August, following a 0.9% decline for July – the latest reading was boosted by an 8% rise in energy prices. PPI is up 7.8% over the past four months at an annual rate. The core PPI reading came in up 0.2% for the month.
From a year-over-year perspective, producer prices are lower by 4.3%, but off of this cycle’s low of -6.8% hit last month. As we mentioned via the latest CPI reading, those year-over-year figures will do a 180 as comparisons become very easy in a couple of months – the figures are currently being gauged against last summer’s commodity-price spike that drove the y/o/y inflation gauges to their highest levels since 1981.
Year-over-year core PPI is up 2.3%, which is down from 2.6% last month.
Intermediate goods, the pig in the python with regard to future inflation pressures, rose 1.8% in August. The trend for intermediate goods prices is not all energy related as the core rate is up 4.8% at an annual rate over the past three months. Core crude goods (again core means ex food and energy, and crude goods are those at the very first stage of production) jumped 6.0% in August, which follows a 2.9% rise in July and a 2.6% pick up in June. I think we can dismiss the deflation fears that remain.
Empire Manufacturing
The Federal Reserve Bank of New York reported that its manufacturing index continued to expand for the second-straight month as the Empire reading rose to 18.88 for September (15.00 was expected) from 12.08. Prior to this two-month move the index had registered readings in contraction mode for 15 consecutive months.
This is a really nice number out of Empire, one of the strongest regional factory readings we’ve seen-- the larger manufacturing regions Philly and Chicago have just barely moved to expansion mode. The New York Fed cited vehicle assemblies as the major driver – the business spending and tech equipment indexes both edged lower but remained positive.
The sub-indices were mixed, and this is the part of the data in which one looks for predictive evidence. The new orders, delivery times and average workweek measures all continued to improve. New orders jumped to 19.84 from 13.43; delivery times improved to 1.19 from -10.64 (a higher number means slower delivery times, which suggests they can’t keep up with increased orders); and the average workweek expanded for the first time in 16 months – this is a really helpful development for factory wages and if the entire manufacturing sector exhibits the same trend it will help to offset continued declines in factory jobs.
However, other sub-indices deteriorated a bit. Shipments fell to 5.34 from 14.11 – although likely just a function of slower delivery times; inventory rebuilding has yet to take place in earnest fashion as that gauge fell and remains deep in contraction mode; and employment continued to decline, falling to -8.33 from -7.45 in August. Further, the prices paid/price received differential remains unhelpful for profit margin as prices paid jumped to 20.24 from 13.83, while prices received continued to decline even though it did so at a reduced rate.
Business Inventories
Lastly, the Commerce Department reported that business inventories fell 1.0% in July, a bit more than the -0.9% expected. The June figure was revised lower to show a 1.4% decline vs. the -1.1% initially reported. This data seems like outdated info, particularly since just touching on the September reading for Empire Manufacturing, but it’s important as it does have implications for current quarter GDP.
The sales data rose just 0.1%, which did move the inventory-to-sales ratio a bit lower, but we have yet to see the inventory dynamic take charge (the rebuilding of inventories fully take effect). This July inventory reading was most hurt by a 2.1% decline in auto and auto parts stockpiles. General merchandise inventories declined 0.9%
This will change over the next couple of months as the data will show inventories rising as result of the clunker-driven auto sales as vehicle assemblies have picked up. This component will drive the overall reading and the good back-to-school clothing and electronics sales, as witnessed via the August retail figures discussed above, should induce general merchandisers to boost stockpiles at the margin.
Have a great day!
Brent Vondera, Senior Analyst
The market got its juice yesterday via a robust August retail sales report and New York-area manufacturing that showed additional advances into expansion territory. We’ll get to both of these reports below but I’ll just quickly point out that one-time clunker cash and a price-driven jump in gasoline sales accounted for 85% of the advance in total retail sales – that doesn’t sound sustainable to me, even forgetting about labor-market and household balance sheet conditions.
Commodity-related basic material shares along with the industrial sector led the advance. The S&P 500 index that tracks basic material shares has jumped 76% since the March lows; the index that tracks industrials is up 77% since the rally began.
Volume picked up yesterday as 1.45 billion shares traded in the NYSE Composite, just about in line with the longer-term average.
Market Activity for September 15, 2009
Retail SalesThe Commerce Department reported that retail sales jumped 2.7% in August (exceeding an expected increase of 1.9%) after a downwardly revised 0.2% decline for July. Factoring out the clunker-cash driven sales, ex-autos retail activity rose a strong 1.1% last month on back-to-school buying and the sales tax holiday. (Retail sales were lower by 5.3% from August 2008. This figure is adjusted for seasonal variations but not for price.)
However, adjust for the spikes in auto and gas station receipts and retail sales rose just 0.6% -- still a good number but considerably lower than the headline print.
The clunker cash fueled a huge 10.6% explosion in auto-related sales (vehicles and parts) and undoubtedly borrows these sales from the future. Much like the first-time homebuyers tax credit does with regard to the housing market, but that’s another story. The nearly 11% surge in auto-related sales is the biggest monthly increase since automakers offered zero-percent financing in October 2001 following the 9/11 attacks. Autos and parts made up 18.3% of total sales, which means it accounted for 70% of the month’s jump.
Gas station receipts jumped 5.1%, even as demand was soft, as wholesales gasoline rose 11% in August.
Back-to-school purchases also helped the overall retail figures as clothing sales were up a big 2.4% in August, general merchandise was up 1.6%, sporting goods and book sales (part of the same segment) climbed 2.3%, and electronics were up 1.1%.
The drags on retail sales were housing-related components as building materials fell 1.2% and furniture sales dropped 1.6%.
The core retail sales figure (excludes building materials, gasoline and autos, and is the figure that flows directing into the personal consumption component of GDP -- these exclusions are picked up by GDP in other ways) rose 0.7%. This more than offsets July’s 0.3% decline, so the third-quarter consumption figure is off to a decent start.
The concern is how the market reacts to ensuing retail figures as the next couple of months will not get help from auto-related clunker subsidies – it will be interesting to watch how the holiday shopping season turns out. The consumer has slowed the reduction in household debt levels as result of the clunker program and the reality is this has to be worked down in the face of stagnant-to-low wage data and an unemployment rate that will reach double digits.
(I should note, in terms of incomes and the household balance sheet: As a few people have pointed out over the past couple of months, and Barry Ritholz has most recently, the decline in personal incomes over the past 15 months can be repaired by the Fed juicing the stock market – household balance sheets are certainly in better shape now after this 55% surge from the bottom. How does the Fed juice the stock market? Well, they push short term rates to zero, which means banks have virtually no borrowing cost and can simply invest in longer-term Treasury securities and make a 340-400 basis point spread. The income from this trade can be invested in the stock market, which has surely occurred, and voila, you’ve got balance sheet repair. Of course, there comes a time when this music stops, which has been my concern as everyone knows, but for now it is working.)
Producer Prices Index (PPI)
The Labor Department reported that producer prices rose 1.7% in August, following a 0.9% decline for July – the latest reading was boosted by an 8% rise in energy prices. PPI is up 7.8% over the past four months at an annual rate. The core PPI reading came in up 0.2% for the month.
From a year-over-year perspective, producer prices are lower by 4.3%, but off of this cycle’s low of -6.8% hit last month. As we mentioned via the latest CPI reading, those year-over-year figures will do a 180 as comparisons become very easy in a couple of months – the figures are currently being gauged against last summer’s commodity-price spike that drove the y/o/y inflation gauges to their highest levels since 1981.
Year-over-year core PPI is up 2.3%, which is down from 2.6% last month.Intermediate goods, the pig in the python with regard to future inflation pressures, rose 1.8% in August. The trend for intermediate goods prices is not all energy related as the core rate is up 4.8% at an annual rate over the past three months. Core crude goods (again core means ex food and energy, and crude goods are those at the very first stage of production) jumped 6.0% in August, which follows a 2.9% rise in July and a 2.6% pick up in June. I think we can dismiss the deflation fears that remain.
Empire Manufacturing
The Federal Reserve Bank of New York reported that its manufacturing index continued to expand for the second-straight month as the Empire reading rose to 18.88 for September (15.00 was expected) from 12.08. Prior to this two-month move the index had registered readings in contraction mode for 15 consecutive months.
This is a really nice number out of Empire, one of the strongest regional factory readings we’ve seen-- the larger manufacturing regions Philly and Chicago have just barely moved to expansion mode. The New York Fed cited vehicle assemblies as the major driver – the business spending and tech equipment indexes both edged lower but remained positive.
The sub-indices were mixed, and this is the part of the data in which one looks for predictive evidence. The new orders, delivery times and average workweek measures all continued to improve. New orders jumped to 19.84 from 13.43; delivery times improved to 1.19 from -10.64 (a higher number means slower delivery times, which suggests they can’t keep up with increased orders); and the average workweek expanded for the first time in 16 months – this is a really helpful development for factory wages and if the entire manufacturing sector exhibits the same trend it will help to offset continued declines in factory jobs.
However, other sub-indices deteriorated a bit. Shipments fell to 5.34 from 14.11 – although likely just a function of slower delivery times; inventory rebuilding has yet to take place in earnest fashion as that gauge fell and remains deep in contraction mode; and employment continued to decline, falling to -8.33 from -7.45 in August. Further, the prices paid/price received differential remains unhelpful for profit margin as prices paid jumped to 20.24 from 13.83, while prices received continued to decline even though it did so at a reduced rate.
Business Inventories
Lastly, the Commerce Department reported that business inventories fell 1.0% in July, a bit more than the -0.9% expected. The June figure was revised lower to show a 1.4% decline vs. the -1.1% initially reported. This data seems like outdated info, particularly since just touching on the September reading for Empire Manufacturing, but it’s important as it does have implications for current quarter GDP.
The sales data rose just 0.1%, which did move the inventory-to-sales ratio a bit lower, but we have yet to see the inventory dynamic take charge (the rebuilding of inventories fully take effect). This July inventory reading was most hurt by a 2.1% decline in auto and auto parts stockpiles. General merchandise inventories declined 0.9%
This will change over the next couple of months as the data will show inventories rising as result of the clunker-driven auto sales as vehicle assemblies have picked up. This component will drive the overall reading and the good back-to-school clothing and electronics sales, as witnessed via the August retail figures discussed above, should induce general merchandisers to boost stockpiles at the margin.Have a great day!
Brent Vondera, Senior Analyst
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