Jobless claims totaled 254k, 6k less than expected after last week’s 251k print. This brings the 4 week average to 256k which matches the lowest level since 1973 from 258k last week. Continuing claims, delayed by a week, fell another 46k to the lowest amount since July 2000. The bottom line is the same bottom line it’s been for months, the level of firing’s remains modest most likely because employers are keeping their qualified employees because of the difficulty in finding new ones. At this point in the economic cycle, most of the influx into the labor force are young people or those being pulled off the couch with attractive wages. This low level of claims is not inconsistent with a slowing pace of job hirings.
Q2 GDP was revised up by one tenth to 1.4% but its old news with us just about done with Q3.
While the S&P 500 rallied yesterday in step with the rise in oil prices, oil is up again today yet stocks are down. I’ll remind people that the R^2 correlation between crude and the S&P 500 over the past 2 ½ year since oil peaked is just .11. Thus, there is essentially no correlation. After all, oil fell 65%+ from its highs and the S&P 500 is just off record highs. To say it simplistically, higher oil prices are good for oil companies and those businesses that cater to it. It is negative for those that use it. With that out of the way, IF the price of oil is on its way back above $50, we must then analyze the broader implications past the oil/gas industry because its potentially hugely important.
Tomorrow we will see the August PCE inflation data. The core rate is expected to rise one tenth to 1.7%, the highest in two years. IF oil prices are headed higher from here, so will headline inflation in coming quarters because we’ve about rolled out the sharp declines in energy prices out of the base effect inflation calculations. The generic gasoline contract is up 6% y/o/y. Crude is up 3.5% and natural gas is up 17% y/o/y. Thus, at a time when I argue global bond markets are extremely vulnerable because of the change in attitude and control (obviously very early stages) with central bankers over their bond markets, imagine if we get higher energy prices at the same time services inflation has been very sticky. This is an argument I’ve been making this year that just wait until we recycle out the declines in energy prices at the same time services inflation ex energy has been running at 3% y/o/y. We now have to consider that not just energy is no longer a drag but a rise in energy prices y/o/y IF OPEC’s move garners success. IF.
Bottom line, IF OPEC marked the bottom in oil prices, higher inflation from here is kryptonite to global bond markets. Kuroda, Draghi, Yellen and Carney though will certainly get closer to the 2% inflation they all crave. If on the other hand oil remains in the $40-50 range, the inflation issue won’t be pressing but the base effects from the inflation calculations will remain to an extent in the coming 12 months.
Pending home sales in August fell 2.4% m/o/m, worse than the estimate of no change. The index is at the 2nd lowest level of the year with January being the weakest. Sales out West and in the South led the decline after gains in July. The NAR continues to blame the dearth of inventories in both limiting choices and causing households to waver “at the steeper home prices.”
Bottom line, higher prices driven by low inventories is the consistent story which is pricing out mostly first time households that are renting instead. Not stated in the NAR report are the other issues that younger families face, that having too much debt and are more challenged in getting a mortgage. The home related etf’s, XHB and ITB, are down a touch and off their highs in response to the data. As for the big picture we are now seeing something very important in the US economy. The two most interest rate sensitive sectors, auto’s and housing, are seeing very mixed consumer behavior and thus are rendering extraordinarily aggressive monetary policy more and more impotent.
With respect to autos, if you didn’t see the JD Power press release the other day, they expect September sales to be down 1.4% y/o/y and said this is occurring even as “incentive spending thus far in September is at a record level of $3,923 per unit, surpassing the previous high of $3,753 set in December 2008.”
With housing, the NAHB builder survey was very good and new home sales came in at the 2nd best level of this recovery but existing home sales (yes, somewhat dated), single family starts, mortgage applications to buy a home and today’s figure were much more mixed.