THE DAILY EDGE (16 February 2018): The Big Dipper (2)

U.S. Factory Output Flat Again in January

Industrial production—a measure of everything made by factories, mines and utilities—fell 0.1% from a month earlier, the Federal Reserve said Thursday. Economists surveyed by The Wall Street Journal expected a 0.3% rise. An initially reported 0.9% gain in December was revised down to 0.4%.

Utility production picked up last month, largely reflecting cold weather that caused homes and business to turn up the heat. But that gain was offset by flat manufacturing output and a drop in mining production. (…)

Capacity use, a measure of slack, dropped two-tenths of a percentage point from a month earlier to 77.5% in January. That’s 2.3% below the economy’s average since the early 1970s. (…)

Economists said the decline in output is almost surely temporary. Other reports, include surveys of manufacturers, suggest factories are seeing higher demand boosting production. (…)

True. Markit’s January Manufacturing PMI survey revealed that

The latest index reading indicated a strong improvement in business conditions across the manufacturing sector. Moreover, the index signalled the strongest upturn in the health of the sector for over two-and-a-half years. Extending the trend seen since June 2016, manufacturers indicated a further rise in production in January. The rate of growth accelerated to the sharpest in twelve months.

Then, how come manufacturing output has been essentially flat since October?

And real retail sales declined 0.2% in December and 0.8% in January.

And vehicle sales have declined 7.6% from their September 2017 peak to stand below their 2016 and 2017 average.

Trucking Rates Come Down a Bit but Problems Persist for Shippers

Rates on the spot market, where companies book last-minute transportation, have come down from record highs hit last month amid a nationwide shortage of available trucks. Shippers have postponed deliveries that aren’t urgent or are moving more cargo by rail, reducing pressure on trucking fleets struggling to hire drivers.

But many shippers and trucking companies warn that the lull may not last, for a number of reasons. The strong economy is boosting freight demand. Produce distributors typically hire more trucks starting this month to move crops from Mexico and Southern states to grocery stores around the country. Full enforcement begins in April for a new federal safety rule that requires truckers to electronically log hours behind the wheel, potentially removing some big rigs from the road.

Last week, the average spot rate for the most common type of big rig was $2.17 per mile, down from $2.26 in January, though still up a third from a year ago, according to online freight marketplace DAT Solutions LLC. Capacity remains tight, with demand measuring at about seven loads per available truck for the week ending Feb. 10, compared with 2.4 loads per truck during the same period in 2017, according to DAT. (…)

Higher freight costs are weighing on corporate profits and raising prices for consumers. On Thursday, wholesaler US Foods Holding Corp. USFD 9.60% said the shortage of available trucks hurt its fourth-quarter profits, and it will attempt to pass along those costs to its restaurant and food-service customers in the coming months. Last week, Tyson Foods Inc.TSN 0.05% said rising freight costs will help push meat prices higher at the supermarket.

Cereal-maker Kellogg K 3.07% Co.’s logistics costs rose at a double-digit rate in the fourth quarter, with percentage increases in the high single digits expected in 2018.

Tight capacity is giving trucking companies the upper hand in negotiations over long-term freight contracts. Contract rates are expected to rise as much as 10% in 2018. This week,Werner Enterprises Inc., WERN -0.39% a large Omaha-based trucking company, reset its guidance on rate increases at between 6% and 10%, up from 4% to 8%. (…)

• U.S. Home Builders Passing Higher Costs to Buyers

But no worry, the Trump administration is on top of the situation:

White House Adviser Cohn Downplays Concerns Over Rising Inflation, Bond Yields

(…) Mr. Cohn downplayed any concerns reflected by markets on Thursday. “We know how to deal with inflation. We don’t know how to deal with deflation in this country,” he said. (…)

The budget deficit fell to 2.4% of gross domestic product in 2015 before rising to 3.4% last year. Economists at J.P. Morgan expect the tax cuts and spending deal will boost the deficit to 5.4% of GDP next year, or $1.2 trillion.

Mr. Cohn said the White House pays close attention to deficits but said higher spending was necessary to secure new defense investments. The administration had to agree to non-defense spending increases to secure votes for the extra Pentagon funding, he said.

“Ultimately deficits do matter,” he said. “We don’t really have a choice here. We need to make a large investment in modernizing our military.”

He’s right. There are not so many ways to deal with inflation: lift interest rates enough to stop demand.

One sure way to raise inflation, however, is to boost demand when it is already strong, stretch resources when they are already stretched and borrow tons of money to do so.

Then you raise interest rates…

THE BIG DIPPER (2)

Since the correction low last Friday, the S&P 500 jumped 200 points (7.9%).

If that was it, we once again re-wrote history with a historically short 13-day correction.

The rising 200-day m.a. once again proved a good stopper, as was the Rule of 20 P/E at “20” (THE BIG DIPPER?).

I suggested to watch coming inflation data as well as the fixed income market, particularly the High Yield market.

• The CPI and the PPI both came in pretty ugly (THE DAILY EDGE (15 February 2018)).
• 10Y Treasuries rose further to 2.9%.
• High Yield rates touched 5.0% and

• Selloff Grips Credit Funds as Rate Fears Ripple Through Markets

Investors pulled $14.1 billion from debt funds, the fifth-largest stretch of redemptions in the week through Feb. 14, according to a Bank of America Merrill Lynch report, citing EPFR data. High-yield bonds lost $10.9 billion alone, the second highest outflow on record. (…)

And beneath the surface, pain metrics have been building up of late.

Derivatives tied to corporate bonds moved more than the underlying cash debt last week — another sign that investors sold more liquid holdings during the equity turmoil rather than offload harder-to-sell debt, according to JPMorgan Chase & Co. (…)

• Trump Embarks on a Gigantic Fiscal Experiment: Debate

We are now back to a level which is 7% above the 200-d. m.a. and a Rule of 20 P/E of 21.1 (if we pro forma trailing EPS for a 7% average tax effect), a quick return to overvalued territory.

Many are concluding that the correction was just a technical “thing” and that we are back on the jolly ride.

And yet, meanwhile, in just a few days, inflation data got much worse, retail sales data were very bad, manufacturing data has flattened, interest rates rose further, the high yield market is shaking, the USD is weak and gold is rising. Something not quite right.

This via John Mauldin:

The index was developed by New York Federal Reserve President William Dudley in the 1990s. It measures financial conditions in money markets, debt and equity markets, and the traditional and shadow banking systems. While the inverse of the index does not perfectly track the S&P 500, it has historically acted as a coincident indicator with peaks in the US equity markets.

The Goldman Sachs FCI is a weighted sum of a short-term bond yield, a long-term corporate yield, the exchange rate, and a stock market variable.

From David Rosenberg: