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Equities bounce back on earnings & news
Econoday Simply Economics 10/24/14
By R. Mark Rogers, Senior U.S. Economist

  

Equities posted the first positive week in five weeks.  Earnings and economic news contributed to lift.  Although mixed, economic news was mostly positive, suggesting moderate forward momentum.


 

Recap of US Markets


 

STOCKS

Equities made a sizeable comeback this past week on both earnings and favorable economic news.   Monday started the week on a positive note despite IBM's third quarter earnings falling well short of expectations.  Others generally beat forecasts on the day.  The upward trend was even stronger Tuesday. 

 

Stocks rallied Tuesday after upbeat earnings from Apple and reports that the European Central Bank was considering buying corporate bonds.  Adding lift, existing home sales rose a greater than expected 2.4 percent.


 

But at mid-week, stocks fell back on the shooting at the Canadian parliament.  Also, lower oil prices pulled down on the energy sector.  Providing some support, soft CPI numbers added to the view that the Fed will not be in a hurry to raise policy rates.

 

Stocks rebounded from Wednesday's selloff on strong corporate earnings.  Leading the way were Caterpillar and 3M which reported better than expected results in the third quarter.  Also, economic news was favorable.  Initial jobless claims rose but remained low.  Home prices rose more than expected and leading indicators gained sharply.  Friday, a favorable earnings report from Microsoft boosted equities.  Also, new home sales topped forecasts.

 

Equities were up this past week. The Dow was up 2.6 percent; the S&P 500, up 4.1 percent; the Nasdaq, up 5.3 percent; the Russell 2000, up 3.4 percent; and the Wilshire 5000, up 4.0 percent.

 

For the year-to-date, major indexes are mixed as follows: the Dow, up 1.4 percent; the S&P 500, up 6.3 percent; the Nasdaq, up 7.4 percent; the Russell 2000, down 3.9 percent; and the Wilshire 5000, up 5.0 percent.


 

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.


 

BONDS

Treasury yields rose this past week on reversal of flight to safety and healthy economic indicators.

 

After essentially no change Monday, rates firmed Tuesday on news that existing home sales topped expectations and hit a one-year high.  Also, funds moved into equities on strong earnings reports.  Wednesday was little changed despite the shootings in the Canadian parliament causing skittishness in equities.  Soft inflation numbers helped hold down rates.

 

Thursday saw moderate gains in Treasury yields on both healthy profits and favorable economic news.  Friday, rates were little changed.

 

For this past week Treasury rates were up as follows: the 2-year note, up 2 basis points; the 5-year note, up 8 basis points; the 7-year note, up 8 basis points; the 10-year note, up 7 basis points; and the 30-year bond, up 7 basis points.  The 3-month T-bill nudged down 1 basis point.


 

OIL PRICES

The spot price of West Texas Intermediate fell for the fourth consecutive week.  After little change Monday and Tuesday, crude dropped $2-1/2 per barrel.  U.S. inventories increased more than expected.  Maintenance season for refineries is pulling down refinery inputs of oil and contributing to large builds for oil inventories.  WTI hit a two-year low.


 

But on Thursday, prices made a moderate comeback (WTI up a little more than $1-1/2 per barrel) on news that Saudi Arabia had cut supplies.  Healthy economic news also added lift.  Friday, the evaluation of Saudi strategy changed.  WTI declined moderately on the view that while Saudi supplies may be temporarily cut, Saudi production is not being cut.

 

Net for the week, the spot price for West Texas Intermediate dropped $1.80 per barrel to settle at $81.24.

 

Since September, prices have been trending down on soft global growth and continued notable supply.


 

The Economy

This past week's economic news focused on housing, manufacturing, and inflation.  Net, the news was favorable.


 

Existing home sales show life in September

Home sales in both the existing and new home categories showed moderate improvement in September.

 

Existing home sales rose a solid 2.4 percent in September to a higher-than-expected annual rate of 5.17 million. This followed a dip of 1.8 percent in August. Year-on-year, however, sales remain flat at minus 1.7 percent. Condo sales were the strongest in the month, up 5.2 percent to a 0.610 million rate with sales of single-family homes showing less growth, up 2.0 percent to a 4.56 million rate. Year-on-year, condo sales show no change with single-family homes at minus 1.9 percent.

 

The strength in sales moved supply off the market, to a total of 2.30 million homes and condos on the market vs 2.31 million in the prior week. Supply relative to sales fell to 5.3 months vs 5.5 months in August.

 

Home prices have been falling, which of course is a plus for sales, and were down 4.0 percent on the month to a median $209,700. Year-on-year, the median price is up 5.6 percent.

 

Regional sales data showed the West with a 7.1 percent monthly gain followed by the largest region which is the South at a 5.0 percent gain. The Northeast, which is the smallest region, showed a 1.5 percent rise while the Midwest was the only region in the negative column in the month, at minus 5.6 percent.

 

The housing market has been flat but the latest report on existing home sales offers a hint of good news, especially given this month's sharp decline in mortgage rates and the steady improvement underway in the labor market. Additionally, homebuilders have to be in an improved mood to see further growth in new home sales.


 

New home sales advance in September

New home sales have been volatile in recent months but saw back-to-back gains in August and September despite a large jump in August which suggested some comeback the next month.  However, there was a dip from the initial August estimate.

 

New home sales, at a 467,000 annual rate, managed to top August's great surge but only after August was revised sharply lower, from 504,000 to 466,000. Still, September's 467,000 rate was the best of the recovery, going back to July 2008 with August's 466,000 right behind in second place.

 

Price concession may be a key factor behind the September and August gains, gains that have lifted sales from this year's earlier run in the low 400,000s. The median price plunged a monthly 9.7 percent to $259,000. The year-on-year rate is in the minus column, at minus 4.0 percent, for only the second time in the last two years. Before this month, the year-on-year price was trending upward in the high single digits.

 

Supply was stable in the report with 207,000 new homes on the market vs 204,000 in August while supply relative to sales is unchanged at 5.3 months.

 

A look at sales by regions shows the Midwest with the largest monthly gain, at 12.3 percent, with the South, where total sales far exceed all other regions combined, at plus 2.0 percent in the month. The only region in the negative column is the West at minus 8.9 percent, a loss however that follows August's giant 28.1 percent surge.

 

The latest reports on existing and new home sales are positives for the economy. New home sales will encourage new construction, possibly adding to fourth quarter GDP growth.


 

FHFA home prices are unexpectedly strong in August

Home price appreciation has been slowing over latter 2013 and 2014.  But there was an unexpected jump in home prices in August—suggesting that housing may be on the mend.

 

Home price appreciation made a comeback according to FHFA with a 0.5 percent gain in August, following rise of 0.2 percent in July.  August posted above market expectations for a 0.3 percent gain.  The year-ago rate firmed to 4.8 percent from 4.6 percent in July.

 

Regionally, seven Census regions reported gains in August while two declined.

 

This past week, housing showed some recent improvement with existing home sales and new home sales up and home prices picking up the pace somewhat.


 

Markit flash PMI manufacturing decelerates in October

The latest readings on manufacturing indicate that growth in manufacturing is softening.  The first national number for October was last week's flash PMI figure.

 

October's PMI manufacturing flash index eased to 56.2, down tangibly from September's final 57.5 reading and compared against a 57.9 flash for mid-month September. The greatest slowing in the month was in the most important component as new business growth came in much weaker than September. The report noted significant slowing in growth for export orders.

 

The Markit flash report is in line with slightly less slowing in the prior week's Philly Fed report and much greater slowing in the Empire State report for October. September proved an exceptionally strong month for manufacturing and is proving a difficult comparison for October.


 

Kansas City manufacturing adds to the slowing view

Kansas City Fed District manufacturing activity grew at a modest pace in October, and producers' optimism for future activity remained solid.

 

The month-over-month composite index was 4 in October, down from 6 in September but slightly higher than 3 in August. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes.  Most other month-over-month indexes were also lower than last month. The production index fell from 12 to 3, and the shipments, new orders, and employment indexes also moved lower. The new orders for exports index decreased from minus 1 to minus 9, and the order backlog index posted its lowest level in over a year.

 

Future factory indexes were mostly stable at solid levels. The future composite index was unchanged at 17, while the future production, shipments, and order backlog indexes eased somewhat. The future new orders index was unchanged at 26, while the future employment index rose from 13 to 16. The future capital expenditures index moved slightly higher from 20 to 21, and the future new orders for exports index rebounded from last month's decline.


 

Consumer price inflation for September keeps Fed loose

Based on recent inflation numbers at the consumer level, the Fed does not yet need to worry that inflation is too high but rather is too low.

 

Consumer price inflation for September came in soft although the headline number was marginally above forecasts.

 

Overall consumer prices in September firmed 0.1 percent after falling 0.2 percent in August.  Market expectations were for no change.  Excluding food and energy, the CPI also nudged up 0.1 percent, following no change in August.  The consensus was for a 0.1 percent increase in September.

 

Energy slipped 0.7 percent, following a drop of 2.6 percent in August.  Gasoline declined 1.0 percent, following a 4.1 percent drop in August.   Food price inflation gained 0.3 percent after posting a 0.2 percent gain in August.

 

The index for all items less food and energy increased 0.1 percent in September. Along with the shelter index, the index for medical care increased, and the indexes for alcoholic beverages and for personal care advanced slightly. Several indexes were unchanged, and the indexes for airline fares and for used cars and trucks declined in September.


 

On a seasonally adjusted basis, the headline CPI was up year-ago 1.7 percent in September—matching August.   Excluding food and energy, the year-ago pace was 1.7 percent, also equaling the August pace. 

 

Currently, inflation is soft and not leading the Fed to hurry the first increase in the fed funds rate next year.  Fed funds futures suggest that first rise will be in the second half.


 

Leading indicators are robust in September

There may be stronger economic growth ahead based on the index of leading indicators.

 

The index of leading economic indicators rose an outsized 0.8 percent in September against an easy August comparison when the index was unchanged. Low interest rates were the major factor contributing to the strength which was very broad based with only one of the 10 components, consumer expectations, in the negative column.

 

The interest rate component had a 0.27 percentage point contribution to the index; lending credit, 0.11 percentage points; initial jobless claims, 0.09 percentage points; and ISM new orders, 0.09 percentage points among the most positive components.

 

The improvement in the labor market was a very strong positive for the month as was the month's strength in manufacturing. Early indications on October's readings are mixed with interest rates moving even lower and the consumer sentiment and consumer comfort indexes both showing strength. On the flat side, however, are unemployment claims and early manufacturing readings.


 

The bottom line

The economy may be heading into the fourth quarter with somewhat improved momentum.  The third quarter is likely to ease off the second quarter's rebound from severe winter weather in the first quarter.  Both housing and manufacturing are oscillating monthly but appear to be on moderate upward trends.  Inflation is still low and that likely will delay Fed tightening.


 

Looking Ahead: Week of October 27 through 31 

This coming week's highlight is likely the Fed's FOMC decision.  Taper is expected to end bond purchase programs but there may be some dissent based on recent FedSpeak.  Traders will be focusing on the state of the economy and guidance on the timing of the first rate increase likely next year.  Manufacturing has shown signs of softening so the durables report will be important for evaluation of forward momentum in this sector.  In contrast, the consumer sector has been improving on average and the personal income report will add detail to this sector.


 

Monday 

The Markit PMI services index in September was strong and steady, well over breakeven 50 at 58.9 and versus 58.5 at mid-month and 59.5 in final August. Backlog was at a record high for this sample, which goes back five years, as new business rose at what the report calls a "sharp and accelerated pace." Employment continued to grow and input price pressures eased. The sample's outlook was very positive with about half expecting business activity to increase over the next year and only 5 percent seeing a reduction.

 

Markit PMI services index (flash) Consensus Forecast for October 14: 58.0

Range: 57.2 to 59.0


 

The pending home sales index decreased 1.0 percent in August. Year-on-year, pending home sales in August were down 2.2 percent.  A lack of first-time buyers and strong demand for rentals remain key obstacles for home sales. A lack of distressed homes on the market is another negative factor.

 

Pending home sales Consensus Forecast for September 14: +0.8 percent

Range: -1.0 to +2.0 percent


 

The Dallas Fed general business activity index in its Texas manufacturing survey moved up to  10.8 in September, nearly four points above its non-recession average of 7.  The production index, a key measure of state manufacturing conditions, rose markedly from 6.8 in August to 17.6, indicating output grew at a faster pace than in August.  Other measures of current manufacturing activity also reflected significantly stronger growth in September. The new orders index climbed 5 points to 7.5-suggesting improved forward momentum.

 

Dallas Fed general business activity index Consensus Forecast for October 14: 7.5

Range: -2.5 to 11.5


 

Tuesday

FOMC meeting begins


 

Durable goods orders fell back in August, coming off July's surge in aircraft orders. But the core was healthy in August.  New factory orders for durables dropped a monthly 18.4 percent, following a spike of 22.5 percent in July.  For the historical series, August was a record monthly decline and July was a record increase.  Transportation fell a monthly 42.2 percent in August, following a 73.3 percent jump the month before.  Excluding transportation, durables orders rebounded 0.4 percent, following a decline of 0.6 percent in July. Recent durables orders have shown record volatility.  On average, durables orders point to modest upward momentum in manufacturing.

 

Numbers reflect revisions from the more recent total factory orders report.

 

New orders for durable goods Consensus Forecast for September 14: +0.9 percent

Range: -0.5 percent to +3.4 percent

 

New orders for durable goods, ex-trans., Consensus Forecast for September 14: +0.5 percent

Range: +0.2 percent to +1.1 percent


 

The S&P/Case-Shiller 20-city home price index (SA) contracted sharply in July, down 0.5 percent for the third straight decline and the steepest monthly decline in Case-Shiller 20-city seasonally adjusted data going back to November 2011. The year-on-year rate, which has been coming down steadily all year from the low double digits, came in at plus 6.7 percent for the lowest reading since November 2012 and down sharply from 8.0 percent in June.

 

The S&P/Case-Shiller 20-city HPI (SA, m/m) Consensus Forecast for August 14: +0.1 percent

Range: -0.3 to +0.4 percent

 

The S&P/Case-Shiller 20-city HPI (NSA, m/m) Consensus Forecast for August 14: +0.4 percent

Range: +0.4 to +0.5 percent

 

The S&P/Case-Shiller 20-city HPI (NSA, y/y) Consensus Forecast for August 14: +5.8 percent

Range: +5.3 to +12.4 percent


 

The Conference Board's consumer confidence index in September fell to 86.0 from August's revised recovery high of 93.4. The September reading was well below the Econoday consensus forecast for 92.5 and well below the low end estimate of 90.0.  Weakness was centered in the expectations component as confidence in the economic outlook and in the jobs outlook fell. And there was also weakness in the current conditions component as fewer consumers described current job openings as plentiful, at 15.1 percent vs August's 17.6 percent. But the jobs-hard-to-get reading, which is closely watched for clues on the monthly employment report, showed only fractional weakness, rising to 30.1 percent from 30.0 percent.

 

Consumer confidence Consensus Forecast for October 14: 86.8

Range: 80.0 to 90.0 


 

The Richmond Fed manufacturing index rose 2 points in September to 14 with details showing incremental acceleration for new orders, also at 14, and shipments which were at 11. Price data showed some acceleration for inputs while inventory data show desired builds for both raw materials and finished goods.

 

Richmond Fed manufacturing index Consensus Forecast for October 14: 10

Range: 10 to 14


 

Wednesday

The FOMC announcement at 2:00 p.m. ET for the October 28-29 FOMC policy meeting is expected to leave policy rates unchanged—with fed funds at range of zero to 0.25 percent.  There has been some minority talk about extending quantitative easing so whether there is a change in plans to end bond purchase programs could be an issue.  However, the biggest issue is likely any change in guidance for the timing of the first rate increase.

 

FOMC Consensus Forecast for 10/29/13 policy vote on fed funds target range: unchanged at a range of zero to 0.25 percent


 

Thursday

GDP growth for the final revision to second quarter GDP showed an upward revision to 4.6 percent from the prior estimate of 4.2 percent and compared to the first quarter decline of 2.1 percent.  The latest second quarter number is the fastest growth rate since the fourth quarter of 2011—also 4.6 percent.  Upward revisions primarily came from nonresidential fixed investment, residential investment, and exports.  Broad demand numbers also were revised up.  Final sales of domestic product were boosted to 3.2 percent, compared to the second estimate of 2.8 percent and a first quarter decline of 1.0 percent.  Final sales to domestic purchasers (which exclude net exports) increased to 3.4 percent, compared to the second estimate of 3.1 percent and a first quarter rise of 0.7 percent.  Chain-weighted prices advanced 2.1 percent annualized, equaling the prior estimate and forecasts and compared to the first quarter number of 1.3 percent.

 

Real GDP Consensus Forecast for advance estimate Q3 14: +3.0 percent annual rate

Range: +2.1 to +3.5 percent annual rate

 

GDP price index Consensus Forecast for advance estimate Q3 14: +1.4 percent annual rate

Range: +1.0 to +1.8 percent annual rate


 

Initial jobless claims rose in the October 18 week, up 17,000 to 283,000 but the trend remained favorable. The prior week, revised only 2,000 higher to 266,000, was a 14-year low. The 4-week average is also at a 14-year low, down 3,000 to 281,000. Continuing claims for the October 11 week fell 38,000 to 2.351 million which is another 14-year low, as is the 4-week average, down 23,000 to 2.381 million. There were no special factors in this report.

 

Jobless Claims Consensus Forecast for 10/25/14: 280,000

Range: 275,000 to 290,000


 

Friday

Personal income growth posted a 0.3 percent gain in August, following a 0.2 percent rise in July. The wages & salaries component was even stronger with a 0.4 percent boost, following a 0.2 percent increase the month before.  Personal spending jumped 0.5 percent after no change in July. Strength was in the durables component which jumped 1.8 percent after no change in July. August reflected a jump in auto sales. Lower gasoline prices tugged down on nondurables. Nondurable spending declined 0.3 percent after no change in July. Services jumped 0.5 percent in August after being unchanged the month before.

 

The latest inflation numbers give the Fed plenty of flexibility for maintaining loose monetary policy.  PCE inflation slowed to a monthly no change in August from 0.1 percent in July. Core PCE inflation posted at 0.1 percent, equaling the pace for July.  On a year-ago basis, headline PCE inflation eased to 1.5 percent from 1.6 percent in July. Year-ago core inflation was 1.5 percent in both August and July. Again, PCE inflation remains well below the Fed goal of 2 percent.

 

Personal income Consensus Forecast for September 14: +0.3 percent

Range: +0.2 to +0.4 percent

 

Personal consumption expenditures Consensus Forecast for September 14: +0.1 percent

Range: -0.1 to +0.3 percent

 

PCE price index Consensus Forecast for September 14: +0.1 percent

Range: -0.2 to +0.1 percent

 

Core PCE price index Consensus Forecast for September 14: +0.1 percent

Range: +0.1 to +0.2 percent


 

The employment cost index surged 0.7 percent in the second quarter versus, however, a record low 0.3 percent in the first quarter.  Pressure was evident in both the wages & salaries component, which jumped 0.6 percent in the quarter, and the benefits component which surged 1.0 percent.  Year-on-year rates all showed significant acceleration and were near or above the 2.0 percent policy threshold. The total ECI is up 2.0 percent year-on-year vs 1.8 percent in the first quarter with wages & salaries at 1.8 percent, vs the first quarter's 1.6 percent, and benefits at 2.5 percent vs 2.1 percent.

 

Employment cost index Consensus Forecast for Q3 14: +0.5 percent

Range: +0.4 to +0.9 percent


 

The Chicago PMI slowed in September month in the Chicago economy, to a still very strong composite index of 60.5 versus 64.3 in August. There was slowing in production, backlog orders and new orders. Inventories spiked to a 41-year high tied to strong demand and longer lead times. Raw material prices were also noteworthy, showing their highest rate of monthly increase since November 2012. Employment was described as steady and soft.

 

Chicago PMI Consensus Forecast for October 14: 60.5

Range: 58.0 to 61.5


 

The Reuter's/University of Michigan's consumer sentiment index rose 1.8 points to 86.4 for the mid-month October reading which is the new recovery high going back to July 2007. The gain was centered in the expectations component, up 3.0 points to 78.4 which is the best reading since October 2012. Gains in this component reflected optimism on job and income prospects. Lagging but still respectable was the current conditions component which was unchanged at a near recovery high of 98.9.  The effect of low gas prices was seen in 1-year inflation expectations which were down 2 tenths to plus 2.8 percent which is very low for this reading. The 5-year inflation outlook was unchanged and also at plus 2.8 percent.

 

Consumer sentiment Consensus Forecast for final October 14: 86.4

Range: 86.0 to 87.0


 

R. Mark Rogers is the author of The Complete Idiot's Guide to Economic Indicators, Penguin Books.


 

He can also be found on a weekly broadcast talking about the U.S. economy, the easiest way to find him is by going to iTunes and searching for "Simply Economics."


 

Econoday Senior Writer Mark Pender contributed to this article.


 

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