Dashboard update: consumer-side improvement and other reasons not to worry

Dashboard PDF file:

Macro and Markets Dashboard: United States (May 14, 2016)
Dashboard Update Summary

Surprisingly good April retail sales growth and preliminary signs of strong May consumer sentiment suggest a continued strengthening of consumer spending. Higher wages and low but rising inflation expectations boost individuals’ willingness to make discretionary purchases. Recent quarterly earnings data suggest that these purchases are increasingly taking place through Amazon and online retailers rather than department stores. Equities were lower over the past five trading days, partially as a result of poor earnings data from the latter. Jobless claims increased in the first week of May, but remain within a reasonable range. The yield curve flattened during the week as the spread between ten-year treasury bonds and three-month t-notes fell to its lowest level since February. The dollar appreciated against most major currencies.

Consumer sentiment and spending rising

Retail sales excluding food increased year over year by 2.7 percent in April. This is the second largest increase since January 2015 (the largest in the past 15 months was in February). In April, Retails sales overall were up three percent over the previous year and up a surprising 1.3 percent over the previous month. Many online retailers, including Amazon, had their strongest-ever quarter in Q1. Meanwhile, this week’s earnings releases from Nordstrom, Kohl’s, and Macy’s shows a continuation in consumers’ pivot away from U.S. department stores. U.S. equities closed lower on the week, with the S&P down half a percent, the Nasdaq down 0.4 percent, and the Dow down 1.2 percent.

retailsales_may132016

Prices remain low with some hills on the horizon

The uptick in retail sales can be attributed in part to higher wages for consumers, as evidenced in recent labor market data. Additionally, fuel prices remain low, yet there is some sign that movement is towards increasing price levels, which incentivizes spending today, especially given a very low return on savings. The April producer price index (PPI), which measures how prices of the inputs to production change, was released this week. The PPI for all commodities (intermediate demand) increased to a -4 percent year over year change, from -4.8. Energy prices fell less dramatically in the twelve month period ending in April. Oil prices climbed 3.5 percent during the past week, but remain below $50 a barrel, at $46.21.

ppiaco_may132016

Jobless claims rise

The number of new jobless claims during the week of May 7 was higher at 294,000. While the highest level of new jobless claims since February of 2015 may seem startling, the level is still low and the increasing bargaining power of labor makes voluntarily leaving a job less scary.

weeklyjobless_may132016

Yield curve flattens as foreign investors avoid negative yields

Another potentially startling indicator is the flattening of treasury yield curves, but again, there is an explanation to assuage concern. The yield spread between ten-year treasuries their three-month t-bill counterpart fell to 1.43 on Friday, from 1.6 a week earlier, as ten-year yields fell and three-month yields rose. Likewise, the spread between ten- and two-year treasuries fell. While this indicator is a potential bad omen, we must remember that foreign inflows to treasury auctions have been increased by negative interest rates in many EU countries and Japan. For example, as ten-year Japanese Government Bond yields remain negative, Japanese investors increasingly shift portfolios to the U.S. government equivalent.

yieldspread_may132016

Dollar appreciates against trading partners

Lastly, the U.S. dollar was stronger against most major currencies during the past week. The dollar appreciated by 1.4 percent against the Yen, by 3.5 percent against the Rand, by 0.85 percent against the Euro, and by half a percent against the British Pound.

I’ve redesigned the exchange rates table to be quicker to read, and include it below.

fx_may132016
Rates above as of May 13, 2016

dash_open

 

Dashboard update: Jobs data and new uncertainty

Dashboard PDF file:

Macro and Markets Dashboard: United States (May 7, 2016 — PDF)
Dashboard Update Summary:

Jobs data for April showed payrolls continue to grow, but at a slower rate. Wage data was strong, however, the labor force participation rate gave up much of its recent improvement. Uncertainty surrounding markets and economic policy seems to have increased in the recent week, and fewer economists now predict a Fed rate hike in June. U.S. equity markets were down for the second consecutive week, while corporate bond yields rose and treasury yields fell. Recent data showed improvement in the trade balance from the weaker dollar, however, the recent depreciation trend has also become less certain.

Jobs Report showed slower jobs growth but wage improvement

The U.S. added 160,000 jobs in April, compared with 208,000 in March and 233,000 in February (both previous months were also revised downward). By sector, much of the growth came from the services side, on an annualized basis. Construction jobs, which make up less than five percent of nonfarm payrolls, were up 4.1 percent, while mining and logging jobs continued their decline and are now down more than fifteen percent over the past year (this is the smallest industry sector shown in the figure below, and represents only 0.4 percent of nonfarm payrolls). Weekly data on new jobless claims, as of April 30, showed still very low, but slightly increased, levels.

jobsector_may072016

The latest jobs report shows continued improvement in both nominal and real wages in practically all sectors. Nominal wages increased most rapidly over the past year in financial services, information services, and leisure and hospitality. On average, wages from the goods sector are higher, largely as a result of low-wage service-sector jobs in leisure and hospitality.

wages_may072016

Equity and Bond market conditions deteriorated

Equity markets were down for the second straight week. The S&P 500 was down 0.4 percent, the Nasdaq composite index was down 0.8 percent, and the Dow Jones industrial average was 0.2 percent lower. Volatility was higher during the week, and the VIX closed Friday at 14.7. The Shiller index of price to earnings ratios was up to 26.02 percent in April from 25.54 in March. Corporate bond yields ticked up during the week. The Merrill Lynch index of junk bond yields was up to 7.56 percent. Ten year treasury yields fell to 1.79 percent.

Economic policy uncertainty improved in April but may revert

Economic policy uncertainty, as measured by Baker, Bloom, and Davis, fell sharply in April, as there was little speculation of Fed action at the April meeting. However, I expect this index to bounce back; uncertainty will increase as the Fed June meeting and Brexit grow closer.

epu_may072016

Oil was down on the week, while April food prices increased

Oil prices closed lower on the week. The U.S. measure of crude oil prices, West Texas Intermediate crude front-month contracts, fell 2.7 percent during the week, to $44.66 a barrel. World food prices from the Food and Agriculture Organization (which I half-jokingly also use as a proxy of political instability) ticked up slightly in April, but remain low.

A weaker dollar improved the trade balance in March

The Fed’s trade-weighted dollar broad index against major currencies fell last Friday (April 29–past week data is released on Mondays) to its lowest level since May 2015. The year-to-date rapid depreciation of the dollar has cut import quantities, as further evidenced in the March data on trade. The trade deficit, which remains roughly 2.2 percent of GDP, improved to -40.4B in March. However, more recent foreign exchange data shows uncertainty about recent depreciation trends. The dollar was stronger against nearly all major trading partners during the past week, notably 1.2 percent against the British pound, 2.76 percent against the Canadian dollar, 3.16 percent against the Australian dollar, 4.5 percent against the Turkish lira, 3,86 percent against the Mexican peso, and 4.3 percent against the South African rand.

tb_may072016

Dashboard update: Inaction has reactions

Dashboard PDF file:

Macro and Markets Dashboard: United States (April 30, 2016 — PDF)

Dashboard update summary:

Markets closed down slightly on the week following inaction from both the Fed and Bank of Japan. Oil and Yen both still became five percent more expensive in dollar terms. Advance estimate 2016 Q1 real GDP growth was weak at 0.6 percent, but in line with expectations. Labor markets continue to be a bright spot, with eyes on next Friday’s April jobs report.

rgdpgrowth_apr302016

Real GDP ticked up 0.6 percent in log terms in the first quarter of 2016. Personal consumption expenditures and residential fixed investment helped to keep GDP growth positive despite a decrease in nonresidential fixed and inventory investment, and growth in the trade gap. The personal savings rate also increased slightly, in quarterly terms, to 5.2 percent in Q1 from 5.0 percent the previous quarter.

FOMC meeting statement changes are kindly highlighted by the Wall Street Journal and include removal of the language about global risks and, some suggestion in my view, based on labor market growth, household income, and consumer sentiment, of a June rate hike. This would depend on continued labor market strength and price pressure plus an upward revision of Q1 GDP.

pcecomp_apr302016

Personal consumption expenditures (PCE) continued to increase in Q1, led by higher spending on services. However, monthly data on PCE as a share of GDP decreased slightly in March over its February level. PCE on durable goods as a percentage of GDP was also down slightly in March, to 7.3 percent from 7.4 percent in February.

Labor market data continues to be spotless. The weekly 257,000 new jobless claims is still near the multi-decade low. Next Friday is jobs day. Both the labor force participation rate and wages should continue to improve.

nasdaq_apr302016

Disappointing earnings data from Apple includes the first decline in iPhone sales nearly since its introduction and a slowdown in sales in China. This hit the Nasdaq particularly hard, as the composite index was down 2.7 percent while the S&P 500 and Dow Jones industrial average fell 1.3 percent each during the week.

oil_apr302016

Oil prices still managed to climb five percent over the past five days. West Texas Intermediate (WTI) crude oil was trading above $46 a barrel at several points during the week. Two recent stories reminded me how oil price fluctuations cause enormous transfers of wealth between countries. Jamaica was praised in this week’s Alphachat series on sovereign debt, while noting that their recent fiscal fortune is aligned with lower prices on their fuel imports. Likewise, a recent IMF publication noted that oil exporting economies in the middle east and central Asia have enacted powerful fiscal stimulus measures to keep their economies moving while they suffer the oil revenue slowdown. Those who believe in the resource curse might note that government measures to shift the economy away from oil are both important and difficult to achieve.

Lastly, the Yen had a volatile week, closing with a five percent appreciation against the dollar. The Brazilian real appreciated nearly four percent during the week, the Swiss franc and Turkish lira appreciated nearly two percent each, the pound sterling nearly one and a half percent and the Canadian dollar nearly one percent.

The full dashboard is here: Macro and Markets Dashboard: United States (April 30, 2016 — PDF)

Dashboard update: oil rally

Dashboard PDF file:

Macro and Markets Dashboard: United States (April 23, 2016 — PDF)

Dashboard update summary:

Oil prices continue to play a dominant role in other markets’ movements. As mentioned in previous updates, corporate earnings expectations are depressed, so even dismal performance (GS Q1 earnings fell 60% for example) can lead individual stocks higher. However, recovery in energy and commodity markets pushes investors from uncertainty-safe investments into riskier pools. This past week was relatively quiet on the macroeconomic data side, and market volatility was low, however, next week offers both Q1 GDP first estimates and an FOMC meeting, and volatility may tick back up.

While Doha talks set expectations for a fall in oil prices, markets actually pushed prices up by 8.4% during the past week (as measured by front-month contracts of WTI crude). Analysts expected further downward pressure from labor strikes in Kuwait, however, prices continued to climb, suggesting we may be on the other side of the bottom. WTI closed at $43.73 on Friday (see below).

oil_apr232016

Yields on U.S. treasuries of various durations climbed during the week. Two-year treasury bond yields were up to 0.84 percent, more than 13 percent above their previous week level. Ten-year treasury yields climbed more than seven period during the week. Corporate bond yields fell during the week, from the AAA level to the junk-bond level.

Equities were mixed on the week, with the Nasdaq down six-tenths of a percent following disappointing earnings at Google, and the Dow and S&P 500 up a hair more than half a percentage point, each.

twoten_apr232016

Exchange rates also continue to fluctuate from week-to-week. The pound sterling appreciated by more than a percent against the dollar, the Canadian dollar by more than two percent, and the Rand by more than 2.5 percent. Meanwhile, the Yen depreciated by more than 1.3 percent against the dollar during the one-week period. The Euro-dollar spot rate was unchanged on the week.

fx_apr232016

 

Dashboard update: signs of price pressure

Macro and Markets Dashboard: United States (April 9, 2016 — PDF)

The first full week of April saw active but net slightly down equity markets. While new economic data during the week was positive, expectations about corporate profits and output levels in the first quarter of 2016 are low. In light of solid fundamentals, and increasing aggregate demand, pessimists (including on the campaign trail) seem to be overreacting. Price data shows signs of upward pressure after an extended decline, and may soon join labor market and equity market indicators in signalling accelerating economic expansion.

The Nasdaq composite index fell 1.3 percent on the week, while both the S&P 500 and the Dow Jones Industrial Average fell 1.2 percent. Volatility, as measured by the VIX, closed Friday 17 percent above its previous week level. The Shiller index of price to earnings ratios climbed in March to 25.5. Expectations about first quarter earnings are very weak.

pe_apr092016

Prices data showed a continuation of upward pressure in March from commodity and food prices. Oil prices climbed more than eight percent during the past week. U.S. oil inventory fell for the first time in eight weeks. March CPI data, due out next week, should reflect the rising fuel and commodity prices.

wti_apr092016

World food prices, measured by the Food and Agriculture Organization of the UN, showed an uptick in March from a jump in sugar prices. This is only the second material increase in the world food price index since early 2014.

ffpi_apr092016

The trade-weighted dollar index continues to show a depreciation in the U.S. dollar. To the frustration of the Bank of Japan, the Yen appreciated nearly three percent against the dollar during the past week, which is not included in the lagged trade-weighted index. The dollar did appreciate against many emerging market currencies, pound sterling, and the Canadian dollar, during the past week.

fx_apr092016

Oil Price Data with Python

This example shows how Python can be used to take a look at oil prices. The script gathers daily oil price data from Quandl and plots how the price has changed over the past few months.

Gathering data

First, we import pandas, numpy, and matplotlib and give them conventional short names.

In [1]:
# Import libraries
import pandas as pd
import numpy as np
import matplotlib as mpl
import matplotlib.pyplot as plt
%matplotlib inline

Next, we identify the url for our data. In this case, the data is provided by Quandl and the url can be obtained by clicking ‘csv’ under the API for any series on the right-hand side of the page. We read the CHRIS CME_CL1 csv file provided by Quandl into a pandas dataframe.

In [2]:
# Import from Quandl WTI crude oil price data
url = "https://www.quandl.com/api/v3/datasets/CHRIS/CME_CL1.csv"
wticl1 = pd.read_csv(url, index_col=0, parse_dates=True)
wticl1.sort_index(inplace=True)
wticl1_last = wticl1['Last']
wticl1['PctCh'] = wticl1.Last.pct_change()

Line plot of oil price

Lastly, we can use matplotlib to generate a line plot showing the most recent 68 days worth of closing prices for WTI crude front month contracts. The past week has seen this measure of oil prices reach nearly $40 per barrel.

In [3]:
fig = plt.figure(figsize=[7,5])
ax1 = plt.subplot(111)
line = wticl1_last.tail(68).plot(color='red',linewidth=3)
ax1.set_ylabel('USD per barrel')
ax1.set_xlabel('')
ax1.set_title('WTI Crude Oil Price', fontsize=18)
ax1.spines["top"].set_visible(False)  
ax1.spines["right"].set_visible(False)  
ax1.get_xaxis().tick_bottom()
ax1.get_yaxis().tick_left()
ax1.tick_params(axis='x', which='major', labelsize=8)
fig.text(0.15, 0.85,'Last: $' + str(wticl1.Last[-1])\
         + ' (as of: ' \
         + str(wticl1.index[-1].strftime('%Y-%m-%d'))\
         + ')');
fig.text(0.15, 0.80,'Change: $' + str(wticl1.Change[-1])\
         + '; ' \
         + str((np.round((wticl1.PctCh[-1] * 100), \
         decimals=2))) + '%')
fig.text(0.1, 0.06, 'Source: ' + url)
fig.text(0.1, 0.02, 'briandew.wordpress.com')
plt.savefig('oil.png', dpi=1000)
oil

Dashboard update: green shoots in March

Macro and Markets Dashboard: United States (April 2, 2016 — PDF)

The final week of March capped off a month of solid equity market gains and encouraging macroeconomic data. New data shows a continued strengthening of labor markets and a reduction in volatility. Bond yields fell during the week, and the dollar depreciated against most major currencies.

All three major U.S. equity market indices were up more than 6.5 percent on the month, while the Nasdaq composite index climbed nearly three percent during the week ending April 1. Volatility, as measured by the VIX, fell to its lowest level since August 2015. Indeed, nearly all major U.S. asset classes posted gains during the month, following a bearish January and February. West Texas Intermediate (WTI) crude oil prices jumped 13.6 percent in March, though they declined more than 2.5 percent during the most recent week.

manpmi_apr022016

Manufacturing Purchasing Managers Index (PMI) data for March from the Institute for Supply Management (ISM) suggests improvement in manufacturing conditions (see above chart). The PMI, which can be thought of as the weighted percentage of purchasing managers who report positively (above 50 suggests growth), posted its first increase in six months. As a bonus, this monthly report comes with possibly the most pithy explanation accompanying any statistic:

PMI® at 51.8%

New Orders and Production Growing
Employment and Inventories Contracting
Supplier Deliveries Slower

The U.S. economy added 215,000 jobs in March, while unemployment figures ticked up slightly to five percent. However, as evidenced in the dashboard and in previous posts, an increase in the labor force participation rate tells a more complex story than an increase in the unemployment rate. A strong labor market will attract people who are otherwise not participating (someone without a job but not looking for work is not considered unemployed under the headline unemployment figure from the BLS). The labor force participation rate has experienced its first six consecutive months without decline since 2005, as people are being drawn into a decent labor market.

unemp_apr022016

Across the board, U.S. bond yields fell during the past week. The real yield curve on a five-year U.S. treasury pushed negative, reaching further than a quarter point into the red (see below). The yield on a ten-year treasury fell to 1.79 percent on Friday, from 1.91 a week earlier. Corporate bond yields in all credit segments were also down during the one-week period.

fiveyearrealyield_apr022016

Touching on some additional data, personal and personal disposable income both increased by 0.2 percent in February. The personal savings rate ticked up to 5.4 percent in February, from 5.3 percent in January. As expected, the net international investment position of the United States continued to deteriorate in Q4 of 2015. The economic policy uncertainty monthly index fell nearly 22 percent in March, providing further evidence for a reduction in uncertainty-related volatility.

Lastly, over the past week the U.S. dollar depreciated against all major non-pegged currencies. Notably, the greenback weakened by more than two percent against the Swiss franc and Canadian dollar, more than one and a half percent against the Yen, and around one percent against the Yuan during the five-day period.

Dashboard update: expectations and central bank signaling

Macro and Markets Dashboard: United States (March 12, 2016 — PDF)

Friday’s bull market led equity and commodity prices to their third consecutive weekly increase. Market volatility has continued to return to more comfortable levels. Investors views on the current macroeconomic environment and expectations about the future are important determinants of market behavior. While the global macroeconomic picture still includes low growth, I worry that unorthodox monetary policy may have its effectiveness counteracted by the signals it sends.

Oil prices, as measured by front-month contracts of West Texas Intermediate crude oil, increased nearly six percent during the week (see below). The S&P 500 and Dow Jones Industrial Average increased by more than a percentage point during the week, while the Nasdaq Composite Index was up two-thirds of a percent.

wti_mar0122016

The CBOE Volatility Index (VIX) fell to its lowest level of the year on Friday, closing at 16.5. Possibly supporting the relative calm in markets, the week offered very little new domestic macroeconomic data. Next week should provide more food for investor thought.

vix_mar0122016

A quiet week for domestic data provides opportunity for reviewing the global picture. The IMF forecasts global growth to remain weak but gradually improve. Emerging markets, including China, continue to experience relatively slower growth and lower demand. Commodity exporters continue to be hurt by the collapse in prices. Global trade has slowed, and some economists have asked whether we have reached the end of globalization.

The European Central Bank (ECB) expanded quantitative easing and cut all interest rates during their meeting this week. Other central banks in the region will likely follow the ECB further into negative interest rate territory. I worry that negative interest rates and other unorthodox monetary policy are not as effective as anticipated. What Keynes termed “animal spirits” plays a role in explaining why the continued lowering of borrowing rates may not lead to more lending.

Negative interest rates send a mixed message. A bank is simultaneously being enticed to lend by the low cost of money while being told that the economy is in unprecedentedly bad shape. Near to zero, the actual effect of small changes to the interest rate can be overpowered by the message that is sent by the direction of movement. When central banks tighten from zero, as the Fed did in December, it signals that monetary policy is moving away from uncharted waters and that the economy is improving. A tightening central bank adds basis points to its arsenal for handling future crises. When central banks such as the ECB and Bank of Japan (BOJ) loosen monetary policy further, they move farther into a territory which scares investors and lenders and constrains their future movement.

In the U.S., labor market tightening, wage growth, core inflation, and signs of modest economic growth push the Fed towards another quarter point rate hike. Most economists, however, do not expect a rate increase from the Fed during its meeting next week. Despite other concerns, such as the weak global picture and the continued strength of the dollar, the animal within me would like to see a Fed funds rate increase in one of the next two meetings.

 

Dashboard update: investors shift assets to safe havens

Macro and Markets Dashboard: United States (February 13, 2016 — PDF)

As a result of the tumultuous start to the year, investors have been increasingly retreating to bastions like gold, Yen, and Swiss Francs. Gold prices have risen nearly 17 percent so far this year (see below). The Yen has appreciated more than six percent against the dollar during the past week, while the Swiss franc strengthened two and a third percent against the greenback.

gold_feb132016

Internationally, an increasing share (now 30%) of all government debt offers negative interest rates (the New York Times ran a fantastic piece on negative interest rates). This week, Japanese government bonds were in the news as the yield on the ten-year JGB fell into negative territory. This suggests expectations of prolonged low or negative interest rates. U.S. Federal Reserve Chair Yellen said that U.S. officials are looking into the option of negative interest rates. The yield on a ten-year U.S. treasury bond fell to 1.63 percent on Thursday. The spread between this ten year government bond and a high-yield corporate bond has climbed to its highest level since the financial crisis (see below).

junkspread_feb132016

Market volatility, as measured by the CBOE VIX, closed above 25 all week, ending the week at 25.04. Oil prices fell further during the week, with the benchmark U.S. measure, front month contracts for West Texas Intermediate crude, closing Friday at USD29.44 per barrel. On Thursday, the price per barrel hit a twelve year low of $26.05 (see below).

oil_feb132016