Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

U.S. FLASH MANUFACTURING PMI DIPS ON WEAK ORDERS

September data highlighted a further upturn in U.S. manufacturing output, but the rate of expansion was modest and only slightly faster than seen on average during the first half of 2016. The latest survey also pointed to a lack of momentum in terms of incoming new orders, especially from export clients.

Manufacturers indicated the slowest overall rise in new business intakes so far this year, which contributed to relatively subdued job hiring and ongoing efforts to reduce inventory levels.

Meanwhile, factory gate charges were reduced slightly in September, despite another marginal increase in input costs at manufacturing firms.

At 51.4 in September, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) was down from 52.0 in August and pointed to the weakest improvement in overall business conditions since June. The latest PMI reading marked seven years of continuous growth across the manufacturing sector. However, the headline index was below the average seen over this period (54.0) and remained close to the post-crisis low recorded in May (50.7).

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Softer rates of output and new business growth were the main factors weighing on the headline PMI during September. Moreover, the latest expansion of manufacturing production was the weakest for three months. Survey respondents suggested that relatively subdued economic conditions had acted as a brake on new order volumes, while there were also reports that the strong dollar had dampened export sales. Reflecting this, latest data signalled that new work rose at the slowest pace since December 2015, while export orders dropped for the first time in four months.

Backlogs of work increased only marginally in September, with the latest accumulation of unfinished business the slowest since May. Despite a lack of pressure on operating capacity, manufacturers indicated a rebound in job creation from the four-month low seen during August. Companies that reported a rise in payroll numbers cited increased investment spending, the launch of new products and continued optimism regarding the term business outlook.

Purchasing activity picked up again in September, which marked five months of sustained growth. At the same time, stocks of inputs decreased at the slowest pace since February. However, manufacturers remained cautious in terms of their holdings of finished goods during September, with the latest fall the fastest recorded for almost one year. A number of firms commented on deliberate reductions to post-production inventories amid efforts to boost cash flow.

Meanwhile, latest survey data highlighted that input cost inflation remained subdued across the manufacturing sector. Higher input prices have been recorded in each of the past six months, but the rate of inflation in September was among the slowest seen over this period. Subdued cost inflation and intense competition for new work resulted in a reduction in manufacturers’ output charges during September. Although only marginal, the decline in factory gate prices was the fastest since April.

THE DAILY EDGE (23 September 2016): Strengthening Case for Rate Increase?

U.S. Leading Economic Indicators Decline

The Conference Board’s Composite Index of Leading Economic Indicators fell 0.2% during August (+1.1% y/y) following a 0.5% July gain, revised from 0.4%. It was the first decline in three months. Expectations had been for no change in the Action Economics Forecast Survey. The three-month change in the index held steady at 2.3% (AR), but was below its peak growth of 7.1% roughly one year ago.

Contributing negatively to the index last month were a shorter factory sector workweek, more initial claims for jobless insurance, a lower ISM new orders index, fewer nondefense capital goods orders and fewer building permits. These declines were offset by positive readings from a gain in stock prices, a steeper interest rate yield curve and the leading credit index.

Doug Short has the best charts on this:

(…) the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk.

Smoothed LEI

Here is a twelve month smoothed out version, which further eliminates the whipsaws:

Smoothed LEI

Chicago Fed National Activity Index Deteriorates

The National Activity Index from the Federal Reserve Bank of Chicago declined to -0.55 during August from 0.24 in July, revised from 0.27. It was the weakest reading in three months. The three-month moving average was little changed at -0.07. During the last ten years, there has been a 75% correlation between the Chicago Fed Index and the q/q change in real GDP.

Weaker readings in the component series were widespread. The Production & Income reading fell sharply to -0.33, its lowest level since March. The Employment, Unemployment & Hours figure declined to -0.09, the weakest level in three months. The Sales, Orders & Inventories figure eased to -0.05, in negative territory where it’s been for most of the past year. The Personal Consumption & Housing reading fell to -0.08, also the weakest figure in three months. The Fed reported that 19 of the component series made positive contributions to the total while 66 made negative contributions. (Chart from Haver Analytics)

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Existing-Home Sales Fall for Second Straight Month Americans reduced home buying for the second straight month in August, suggesting the housing market might be stumbling due to a run-up in prices, an inventory shortage and persistent doubts about the economy’s strength.

Sales of previously owned homes fell 0.9% from a month earlier to an annual rate of 5.33 million, the National Association of Realtors said Thursday. (…)

The median price of an existing home—the point at which half of all homes were priced above and half priced below—stood at $240,200 in August, up 5.1% from a year earlier.

Higher prices have been driven in part by dwindling inventory. The number of homes on the market has declined 10.1% over the past year. Regionally, sales rose in only the Northeast last month from July, while declining in the South, West and Midwest.

Curiously, even though real estate is more local than national, the YoY trend is similar across the country as this Haver Analytics table shows:

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Many economists, including the NAR’s Lawrence Yun, say that the lack of available inventory is the main cause and that higher housing starts would help, housing starts data don’t go along that thesis. In effect, starts are up 24.8% YoY in the Northeast, 17.1% in the Midwest and 15.7% in the West. Only the South has seen a drop in starts this year.

Looking at longer term charts, I tend to think that the housing market is simply near its “normal” cyclical peak, considering that the 2003-07 peak was a bubble aberration.

And as much as realtors complain about the lack of inventory (same as listings for them), the reality is that we are simply back to normality after the “good old bubble days”. (Charts from CalculatedRisk)

What is below normal is housing starts which continue to suffer from demographics and financial considerations:

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SENTIMENT WATCH
US stock funds suffer biggest redemptions since Brexit vote

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Bespoke Investment shows that the bears are back:

aaii-bearish-sentiment092216

Money Money Money QE has created a tremendous gap between asset price inflation and the “real economy” inflation. (Via The Daily Shot)

Just kidding US elections and the media: How did we get here? – The Listening Post