Week of Sep 26, 2022
Economic indicators published this week and the implications?
US Building Permits: The revised August month-over-month change was -8.5% (July: -0.6%). This is a dramatic drop, and if it continues, it means that there is not much appetite amongst builders to get permits and build new residential units. Note that this is only one data point. Also, this happens against the backdrop of supply-demand imbalance in the US (with lower supply compared to demand).
US durable goods orders: were down by 0.20%. The expectation was a reduction of 0.40%. Therefore, although the orders of durable goods reduced, it was not as low as it was expected. This is an indication that the economy is doing better compared to expectations.
Redbook year-over-year change: showed an increase of 11%. The prior month showed an increase of 10.5%.
(Redbook index is a sales-weighted of year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9000 stores.)
Note that we cannot say what portion of this increase is related to the increase in volume and what portion is related to the price increase (inflation), but assuming inflation of 8%, we will have a 3% real increase.
US house price index: changed -0.60% month-over-month in Jul 2022. The change in the index was +0.10% for June 2022.
The year-over-year change in the index was +13.90% in July and +16.30% in June 2022.
US consumer confidence in Sep 2022 was at 108.00 up from 103.60 in the prior month. The consensus expectation was 104.50. Therefore, the confidence is higher than expected and increasing from the prior month.
New home sales for the month of August showed an increase of 28.80% month over month, which is significant. In July, the same metric was -8.60%.
Richmond Fed manufacturing index which covers Maryland, North and South Carolinas, the District of Columbia, and Virginia, was unchanged. Manufacturing shipment was up 14% (prior month was -8%). Note that this is not nationwide and only for the areas mentioned above.
API (American Petroleum Institute), which reports inventory levels of US crude oil, gasoline, and distillates stocks, reported that the crude oil inventory was up by 4.15 million barrels whereas the gasoline inventory was down by 1.05 million barrels in the week of Sep 19, 2022.
United States M2 money supply in August increased by $1.8 billion, seasonally adjusted. M1, seasonally adjusted decreased by $63 billion. Since M1 is included in M2, putting together these two pieces of data means that cash was moved from accounts with high accessibility into less liquid term deposits such as GICs.
These are the description for M1 and M2 as per the Federal Reserve Website. Click to expand.
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M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of other checkable deposits (or OCDs, which comprise negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions) and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and other liquid deposits, each seasonally adjusted separately.
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M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (2) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing small-denomination time deposits and retail MMFs, each seasonally adjusted separately, and adding the result to seasonally adjusted M1.
MBA (Mortgage Bankers Association) 30-year mortgage rate: was at 6.25% during the week of Sep 19, 2022.
MBA mortgage application: was down 3.70% during the week of Sep 19, 2022.
Trade deficit – Goods: was at $87.30 billion in August compared with $89.06 billion in July. Perhaps the strength of the dollar has contributed to the lower amount, and the reduction is not only due to volume.
National Association of Realtors published ‘Pending Home Sales Index’ for the month of August which showed a decrease of 2.00% month over month.
Survey of Business Uncertainty (Federal Reserve Bank of Atlanta):
Sales Growth: uncertainty was down to 4.13 in September 2022, improving from 4.73 in August and 5.01 in July.
Employment Growth: uncertainty was up to 5.51 in September 2022, deteriorating from 5.44 in August and 5.06 in July.
This data indicates that the sales prospect is improving but the employment prospect is deteriorating. This means that we might have lower unemployment. While employers are under pressure for filling out the positions and perhaps paying more or making compromises, there will not be that much pressure on employees to improve their productivity.
US Investor Confidence Index published by State Street was at 108.8 for the month of September, which remained relatively stable compared with the previous month at 107.3. At the sub-index level, the confidence among North American and Asian investors increased while the confidence among European investors decreased.
Germany’s CPI increased by 10.10% year-over-year and 1.8% month-over-month.
US Jobless initial claims: was 193,000, with the expected consensus at 215,000.
US Continuous Claims: was at 1.35 million, with the consensus at 1.39 million.
PCE Index - August 2022:
PCE Price Index increased by 0.3%. PCE Price Index, excluding food and energy, increased by 0.6%. The expectation for both of these metrics were lower, so there was an upside surprise. Real DPI (Disposable Personal income) increased by 0.1% in August.
Real PCE increased by 0.1% (represents a spending increase of 0.2% on services and a decrease of 0.2% on goods).
Personal income increased by 0.3% on a nominal basis.
Note that the Fed puts special emphasis on PCE, just as much as CPI if not more.
What is the implication of the information above?
Note that most of the indicators shown above are lagged indicators. The outsized increase in the federal funds rate and the quantitative tightening that just picked up in September are not reflected in these figures. We had a stock market rally (some referring to it as bear market rally) during July and August that might be behind the optimism in some of the indicators above.
But taking the information above at face value and assuming that these are facts as of today, the corollary would be that the economy is still strong, and the demand will remain strong. If the supply constraints continue, the Fed should tighten the monetary policy to a higher level in order to choke demand. And let’s remember that the consumers’ balance sheet is still very strong.
The markets have been on a downward trend during the past two weeks with S&P500 going below the lows of June 2022. We anticipated this in our Economic Outlook post two months ago. In the absence of any economic accident, we expect the downward trend to continue gradually with some peaks along the way. So there is some opportunity along the way. One opportunity that we can point out, as we did in our Energy post, are stocks in the energy sector. We still believe that the market underestimates the amount of energy that is needed during next year. Given the right entry price, investors can make a good return by investing in energy sector.