Wednesday, July 15, 2009

Morning Update/ Market Thread 7/15

Good Morning,

Futures are up overnight as Intel’s rosy demand prediction lifted the entire market and it has not fallen back:

That price action now has prices right at the top of the blue channel depicted below. A break above that channel is a clue that wave c of B may be occurring:

The short term stochastics are very overbought and there is a small RSI divergence at this point.

The MBA purchase applications index plunged from 285.6 down to 258.8 for the past week. Here’s Econoday:
Whatever improvement there was in the MBA's purchase index was fleeting, falling back in the July 10 week by a heavy 9.4 percent to 258.8. Difficult job conditions and difficult credit conditions continue to limit home buying despite falling prices and low rates. Rates have been lower but are falling again, at 5.05 percent for 30-year loans for a nearly 30 point drop in the week. Low rates fuel demand for refinancing where the index rose 18 percent in the week to 1,707. Next data on the housing sector will be the housing market index tomorrow.

Well, bonds are down again this morning producing higher rates… the recent up trend line in prices (lower rates) has been broken.

The CPI data is doing the same thing as the PPI data did, namely showing month over month improvement but at the same time year over year is negative by 1.2%. Again, here’s Econoday’s spin, I pay far greater attention to the year over year numbers than the month over month:
In June, consumer price inflation jumped and on higher gasoline price but other components also added to the spike. The headline CPI surged 0.7 percent, following a 0.1 percent uptick in May. The June rate matched the market forecast. In the latest month, energy costs posted a 7.4 percent hike while food price inflation was unchanged. Meanwhile, core CPI inflation firmed to 0.2 percent in June from a 0.1 percent uptick in May. The market expectation was for a 0.1 percent gain for the core.

The 7.4 percent boost in energy costs was due to a 17.3 percent spike in gasoline prices after a 3.1 percent gain in May.. Heating oil rose 2.0 percent while piped gas and electricity declined 1.2 percent.

Within the core, new & used motor vehicles advanced 0.4 percent, apparel jumped 0.7 percent, and recreation gained 0.5 percent (largely on admission fees and for cable and for satellite television and radio). Tobacco and smoking products increased 0.8 percent. On the soft side were rent of primary residence and owners' equivalent rent, both rising 0.1 percent.

On a year-ago basis, headline inflation dropped to down 1.2 percent (seasonally adjusted) in June from down 1.0 percent in May. Meanwhile, the core rate eased to up 1.7 percent from up 1.8 percent in May. On an unadjusted year-ago basis, the headline number was down 1.4 percent in June while the core was up 1.7 percent.

The June CPI report showed temporarily hot headline inflation as the energy component is expected to reverse in July. But some portions of the core were stronger than expected, including apparel and recreation. Also, the CPI for new and used motor vehicles rose significantly.

While most of the headline numbers should be shrugged off, the firming in the core should be a little worrisome and likely will weigh on bond prices. There were enough components showing notable increases to question the view that the recession is keeping inflation down. Also, the Empire State manufacturing index posted a nice increase and that should also help bond yields bump up.

And the Empire Manufacturing index did indeed post a nice gain, rising from negative 9.4 to just negative .55:
Rates of manufacturing decline are slowing decisively, pointing to a near-term bottoming in the sector and what would be a big plus for the economic outlook. The Empire State general business conditions index is only slightly negative in the July report, at -0.55 vs. -9.41 in June. A zero reading would indicate no month-to-month change, and at least that high of a reading seems certain for the next report given the big improvement in new orders which jumped into positive ground, at 5.89 indicating month-to-month growth vs. a long run of negative readings.

Shipments also shifted into growth mode, at 10.97 vs. May's -4.84. Prices paid likewise showed an increase, at 10.42 vs. -5.75 and likely reflecting more than just energy prices which have come down so far this month. Despite the signs of improvement, both here and in other reports, firms continue to destock at an accelerating rate with the inventories index at -36.48 vs. -25.29 in May. Thin inventories are not a vote of confidence in the outlook but will help limit future layoffs as demand for future goods will have to be met by production. A mild negative in the report is an easing back in the general six-month outlook where the index fell about 14 points to a still optimistic 33.99.

A leveling in the manufacturing sector would not only point to wider economic recovery but would also give a boost to demand for risk. Confirmation of strength in the manufacturing sector could make tomorrow's report from the Philadelphia Federal Reserve a market-moving report.

We’ll have to watch this one. While it appears to be a positive that this index has leveled off, the level of manufacturing is so low that no growth in manufacturing still means dire times. But no growth is certainly better than freefall, so we’ll see what happens as we exit the spring time and lose the seasonality later.

Industrial production fell .4% in June, less of a fall than forecast month over month. Capacity utilization rose to a still very anemic 68% which was slightly better than forecast.

So, there’s enough green shoot data (less of a free fall) that the holders of now worth less and less fiat dollars may generate another leg up. Watch that channel top, a break above is bullish and I would not stick around on the short side if it breaks. On the other hand, if it holds, there may be a good short opportunity coming off it, but I don’t see the fuel for the shorts today except for the overbought condition. Hey, no matter which way it goes, you’ve got to roll with the changes!

Have a good day,


Roll With the Changes - Styx and REO Speedwagon: