Industrial production in September rose .1% m/o/m, in line with the estimate while August was revised down one tenth. The manufacturing component rose .2% after a .5% decline last month and we’ll call that in line with the August revision included. Within manufacturing, auto production was up just .1% m/o/m but still remains up 5% y/o/y. Machinery production remains negative while computer/electronic production remains muted as it was unchanged m/o/m and up just 1.9% vs last year. Mining production rebounded by .4% m/o/m but remains down 9.4% y/o/y. Utility output fell 1% but that’s mostly weather related. Capacity utilization rose a tick to 75.4% but this remains well below the 25 year average of almost 79% and off that same level that was touched in November 2014.
Bottom line, manufacturing production in the US has basically flat lined over the past two years and there are no signs that will change anytime soon to the upside. The index at 103.1 compares with 102.6 in October 2014 and 103.5 in November 2014. Also, with capacity utilization running almost 400 bps below its long term average it’s no wonder capital spending remains punk.
The long end of global bond markets are getting hit again with most yields jumping. On top of weakness that started to develop in August when the BoJ started to back away in their pace of buying longer JGB’s, we now have Mark Carney and Janet Yellen telling us they are willing to tolerate higher than target inflation. The market is now telling them how idiotic that idea is. Create a bond bubble of massive proportions and then say we want higher than target inflation. What a toxic combination. Starting in Asia, JGB yields were little changed but yields jumped in Hong Kong, Singapore, Australia, etc… The 10 yr Gilt yield is now 1.12%, and near to getting back all of what it lost in yield after the UK vote. The German 10 yr just about recovered the entire yield drop post UK vote. The US 10 yr yield did touch 1.80% early this morning, a level last seen on June 2nd but has since backed off.
In a speech titled “Why are interest rates so low? Causes and implications”, Stanley Fischer is premising the speech on “why we should be concerned about such low interest rates.” He raises the possible explanations for why and risks that it entails. Firstly, “the economy’s long run growth prospects are dim.” Secondly, “low interest rates make the economy more vulnerable to adverse shocks that can put it in a recession” which “could therefore lead to longer and deeper recessions when the economy is hit by negative shocks.” Thirdly, “low interest rates may also threaten financial stability as some investors reach for yield and compressed net interest margins make it harder for some financial institutions to build up capital buffers.”
He then says this, “Those are three powerful reasons to prefer interest rates that are higher than current rates. But, of course, Fed interest rates are kept very low at the moment because of the need to maintain aggregate demand at levels that will support the attainment of our dual policy goals of maximum sustainable employment and price stability…” This is then followed by an academic discussion on the ‘equilibrium interest rate’ and why it is so low. I’ve touched upon that before in that it’s another feedback loop the Fed is on.
Bottom line, we have another central banker that is raising the risks of rates that are too low (even though he doesn’t give any guidance whatsoever on what the Fed will do with the short end) and particularly in its pernicious impact on grabbing yield at all costs and to bank profitability. Why all of sudden the Fed is so focused on the large risks of rates are so low after raising just once since rates first went to zero in 2008 I don’t know but it doesn’t matter at this point. They seem to want rates higher or at least on the longer end which we have been seeing in order to give some breathing room to the banking system. Kuroda in Japan acknowledged this and Draghi must be considering the banking strains he is now presiding over. Again, sell long term bonds. What will the Fed do in December with this kind of rhetoric? Likely it will depend on where the S&P 500 is trading at when they sit around the conference table.
As anger spawned Donald Trump, Bernie Sanders, and Brexit, will central banks be the next target? In The Guardian newspaper over the weekend I came across this story: “Is the Bank of England to blame for shrinking your pension pot?” Expect more of that questioning to come throughout Europe and in the US. Japan’s been dealing with it for decades.
The final look at September CPI in the Eurozone was no different than the preliminary look a few weeks ago. Headline CPI rose .4% y/o/y and .8% at the core level. That headline level by the way matches the most since June 2014 as the declines from energy dissipate. As I’ve said many times before, that will be the case too in the US where natural gas is up 40% y/o/y, the average gallon of gasoline according to AAA is now unchanged y/o/y, heating oil is up 8% y/o/y and crude is higher by 10% y/o/y. The only saving grace is the 9% y/o/y drop in the CRB food stuff index.
Ahead of the flood of earnings, the most noteworthy market response to what has been seen so far has been the size of the moves. After earnings and/or guidance, HON fell 7.5%, PPG was down 8.3%, DOV was slammed by 7.7%, FAST dropped 5%. On the other side, DAL rallied 2% and CSX jumped by 3%. Bank stocks after the initial reaction mostly closed little changed after their reports Friday. Bottom line, put your seat belt on not only because of rising interest rates which are happening not because the economic data has gotten better but ahead of earnings this week. For perspective on the S&P 500, Friday’s close was 2133. We traded at 2134 on May 20th, 2015 and 2133 on July 20th, 2015. Was the July 2016 rally above these levels a false breakout or not. The next two weeks may answer that question for us.
In the first October industrial figure to be released, the NY manufacturing index fell to -6.8 from -2.0 in September. That was 7.8 pts below expectations and marks the 3rd month in a row of a contraction. The internals actually improved slightly m/o/m (headline number is not a sum of its parts) but still remained negative mostly across the board. The categories that were positive were on the inflation side as prices paid rose almost 6 pts to the most in two years. Also of note, prices received were up by 3 pts to the highest since July 2015. The six month outlook was up by 1.5 but at 36 it is the best since April 2015. Capital spending plans were mixed.
Bottom line, we have continued manufacturing softness right now but there is optimism for the future. Maybe that is because we’ll know who the next President is regardless of the baggage and policies one or the other will bring. As for the market response, we already know manufacturing is soft but for those looking for a rebound, at least in the NY area it hasn’t been seen yet in October.