July data pointed to continued strong growth of production levels and incoming new business across the U.S. manufacturing sector, although the latest survey indicated some loss of momentum since the previous month. Employment growth also moderated during July, and was the weakest in the current 13-month period of workforce expansion. However, latest data signalled a robust rise in input buying and renewed efforts to boost pre-production inventories, which survey respondents attributed to sharp increases in overall new business volumes.

Adjusted for seasonal influences, the final Markit U.S. Manufacturing PMI registered 55.8 in July, down from a 49-month high of 57.3 in June. Although the latest reading was the lowest since April, the index remained well above the neutral 50.0 value and signalled a robust improvement in overall business conditions across the manufacturing sector.


Production volumes increased sharply in July, although the pace of expansion moderated after hitting its fastest for over four years in June. Higher levels of output were linked to improving domestic economic conditions and strong client demand.

imageIn line with the trend for production, new business growth held close to its fastest for over four years, despite the pace of expansion slowing since June. Survey respondents mainly cited the launch of new products and greater spending among domestic clients. Meanwhile, latest data suggested that export sales continued to weigh on overall new business growth, with the latest rise only marginal and the slowest in the current six-month period of expansion.

Higher levels of new work contributed to a solid increase in outstanding business in July, although the rate of backlog accumulation slipped to a four-month low. Pressures on operating capacity contributed to another rise in payroll numbers. However, the latest increase in employment was the weakest for over a year, which some firms attributed to the non-replacement of voluntary leavers.

Meanwhile, input cost inflation eased for the first time since April and remained subdued in comparison to the average seen since the survey began. Factory gate charges nonetheless increased at a solid pace in July, with the latest rise the fastest seen in 2014 so far.

July data suggested that large manufacturers (500+ employees) saw the greatest moderation in output growth since the previous month. Small manufacturers (1-99 employees) bucked the wider trend and posted their strongest rise in production levels since April 2010. Meanwhile, medium-sized manufacturers (100- 499 employees) were the best performing in terms of jobs growth during the latest survey period.

All three market groups (consumer, intermediate and investment goods) registered strong rates of output growth in July. Investment goods producers posted the fastest rise in output. Meanwhile, consumer goods producers saw the least marked upturn in overall business conditions, with this sub-category the only market group to see a drop in staffing levels over the month.

NEW$ & VIEW$ (1 AUGUST 2014)

U.S. job growth cools, unemployment rate rises to 6.2 percent

Nonfarm payrolls increased 209,000 last month after surging by 298,000 in June, the Labor Department said on Friday.

Data for May and June were revised to show a total of 15,000 more jobs created than previously reported, showing underlying momentum.

July marked the sixth straight month that employment has expanded by more than 200,000 jobs, a stretch last seen in 1997. The one tenth of a percentage point increase in the unemployment rate to 6.2 percent came as more people entered the labor market, a sign of confidence in the job market.

Average hourly earnings, which are being closely monitored as a potential signal of reduced slack that could prompt the Fed to raise rates, rose only one cent. That left the annual rate of increase at 2.0 percent, still well below the levels that would make Fed officials nervous. (…)

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, increased to 62.9 percent in July after holding at 62.8 percent for three consecutive months.

A broad measure of unemployment that includes people who want a job but have given up searching and those working part-time because they cannot find full-time jobs edged up to 12.2 percent after hitting its lowest level since October 2008 in June.

Job gains were broad-based in July. Services industries employment accounted for the bulk of the gains, adding 140,000 positions. That compared to 232,000 jobs in June.

Manufacturing payrolls increased for the 12th month in a row, adding 28,000 jobs in July. Construction jobs advanced for the seventh consecutive month, with July payrolls rising 22,000. Government employment increased by 11,000 jobs.

The length of the average workweek held steady at 34.5 hours.


Consumer Spending in U.S. Rose in June by Most in Three Months

Household purchases, which account for about 70 percent of the economy, climbed 0.4 percent after a 0.3 percent gain in May that was larger than previously estimated, Commerce Department figures showed today in Washington. Incomes also advanced 0.4 percent. (…)

Today’s consumption data showed that after adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases rose 0.2 percent after a 0.1 percent gain the previous month.

Spending on durable goods, including automobiles, increased 0.4 percent after adjusting for inflation following a 1.3 percent advance in May. Purchases of non-durable goods, which include gasoline, rose 0.3 percent.

Household outlays on services increased 0.1 percent after adjusting for inflation. In addition to health care, the category also includes utilities, tourism, legal help and personal care items such as haircuts. This typically makes it difficult for the government to estimate accurately in the preliminary report.

Today’s data also showed the core price measure, which excludes fuel and food, increased 0.1 percent in June from the prior month and was up 1.5 percent from a year ago, the same as in May. Total prices tied to consumer spending rose 1.6 percent in the year ended June, after advancing 1.7 percent in May.

Decline in Food Stamps Shows Low-Income Relief

About 46.25 million people were enrolled in the Supplemental Nutrition Assistance Program in April, according to the most-recent data available from the Department of Agriculture. That’s down 3.2 percent from a high of almost 47.8 million in December 2012. May figures are scheduled to be released Aug. 8.


Chicago bucks the trend of all other regional PMIs: The Chicago Business Barometer dropped 10.0 points to 52.6 in July, significantly down from May’s seven month high of 65.5, led by a collapse in Production and the ordering components, all of which have been strong since last fall.

Ghost A monthly fall of this magnitude has not been seen since October 2008 and left the Barometer at its lowest level since June 2013.

In spite of the sharp decline this month, feedback from purchasing managers was that they saw the downturn as a lull rather than the start of a new downward trend. This was especially so given the recent strong performance and the fact that Employment managed to increase further in July. Nonetheless, following a strong Q2, this was clearly a poor start to Q3 and as such tempers some of the increased optimism in recent months.

Production’s large decline in July left the indicator barely in expansionary territory and at a two year low, although this followed a very strong run with output above 70 in June. New Orders, the most heavily weighted component of the barometer, saw its biggest monthly set back since November 2013. Order Backlogs, which have expanded in every month since last October, fell into contraction in July.

The rise in the Employment component in July appeared to be somewhat of an anomaly, although one reading of it suggests that panellists expect the lull in output and orders to prove temporary.

U.S.: Household formation fosters inflation

After five quarters of virtual standstill, household formation is finally picking up. According to our calculations, the number of U.S. households rose by the most in two years in Q2 on a seasonally adjusted basis. As today’s Hot Charts show, the number of occupied housing units now exceeds 115 million for the first time on record. The increase, however, was again dominated by renters whose number now approaches 41 million – the number of homeowners was essentially unchanged. The popularity of renting over buying has been so strong that the rental vacancy rates plunged to its lowest level since 1995 in Q2 2014. As shown, the low vacancy rate continues to put upward pressure on the most important component of the U.S. CPI: the owners’ equivalent rent (23% of the index). We think that there is more upside to that component in the coming months, hence our view that core inflation is more likely to surprise on the upside than the downside. (NBF)


U.S. Initial Unemployment Insurance Claims Recoup Earlier Decline

Initial unemployment insurance claims rebounded to 302,000 (-9.3% y/y) during the week ended July 26 from 279,000 in the week prior, earlier reported as 284,000. The four-week moving average of initial claims, nevertheless, fell to 297,250, the lowest level since April 2006.

The charts from Doug Short clearly show where we are in the cycle:

Click to View

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U.S. Wages and Benefits Rise U.S. employers’ labor costs rose in the second quarter at the fastest rate in nearly six years, a sign that a tightening labor market may be raising pressure on companies to boost worker pay.

The employment-cost index, a broad measure of pay and benefits, rose a seasonally adjusted 0.7% during the period from April to June, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal expected a 0.5% increase.

Wages and salaries, which make up about 70% of compensation costs, rose 0.6% in the second quarter, the fastest rate of increase since the third quarter of 2008. Benefits, which include paid leave and insurance policies, rose 1%. (…) (Charts from Haver Analytics)

 large image large image
For the record: last 9 months: comp: +2.1% a.r., w & s: +2.0% a.r.
                          last 6 months: comp: +2.2% a.r., w & s: +2.0%: a.r.
                          last 3 months: comp: +3.2% a.r., w & s: +3.2% a.r.

(All data above for private industry workers)

Congress passes infrastructure spending bill Highway Trust Fund set for $11bn boost

(…) The legislation, which was crafted by Republicans, provides a temporary fix until May 2015. Although the White House has backed it, the Obama administration has called for longer-term solutions to the erosion of highway funding.

The bill will channel as much as $11bn into the fund through a technique called pensions smoothing, which will temporarily raise tax revenues from companies, and an increase in customs fees. (…)


From Zacks Research:

The overall picture emerging from the ongoing Q2 earnings season is notably better relative to what has been on offer in the recent past – growth is improving, more companies are beating estimates, and there is even some modest improvement on the guidance front.

Not only are total earnings on track to surpass the prior all-time quarterly record set two quarters back, but the growth profile also appears to have started improving. Estimates in the aggregate for the current quarter are following the pattern that we have been seeing quarter after quarter, but the magnitude of negative revisions is notably less relative to other recent comparable periods.

Having seen results from 361 S&P 500 members that combined account for 78.3% of the index’s total market capitalization, our overall take on this earnings season is notably positive relative to other recent reporting seasons. Total earnings for these 361 companies are up +8.9% from the same period last year on +5% higher revenues, with 66.7% beating EPS estimates and 59.6% coming out with positive revenue surprises. This is better performance than we have seen at this stage in other recent reporting cycles.

Pointing up The aggregate growth picture is actually even better once the Finance sector’s anemic growth numbers are excluded. Excluding Finance, total earnings for the 361 S&P 500 companies that have reported results are up +11.5% from the same period last year on +5.8% higher revenues.

The composite picture for Q2, combining the actual results from the 361 S&P 500 members that have reported with estimates for the still-to-come 139 companies, total earnings are expected to reach a new all-time quarterly record, and increase by +7.5% from the same period last year on +3.5% higher revenues. This is a material improvement over the preceding quarter, when total earnings and revenues were essentially flat.

Estimates for the 2014 Q3 have started coming down, with the current +4.8% total earnings growth expected in the current period down from +6.5% last week. But the magnitude of negative revisions in Q3 thus far is the lowest we have seen in more than a year.

Prescient Bears Are Growling Again

(…) “There’s one thing for sure: History repeats itself, and this is starting to feel like a bubble,” said Stuart Lippman, manager of a credit-markets-focused hedge fund at TIG Advisors LLC in New York. “We’re building up to something.”

Whitebox Advisors LLC, a Minneapolis hedge-fund firm that anticipated the crisis, warning of an imminent credit-market panic as early as 2006, is close to starting a fund to wager against the debt of several European countries and the euro, according to a letter to investors viewed by The Wall Street Journal.

The moves don’t quite yet represent another “big short,” the term writer Michael Lewis applied to precrisis bets against soaring housing prices. In most cases, the hedge funds say they are trying to capitalize on prices they think are far out of whack and that may suffer a correction over the coming months, rather than predicting widespread financial calamity.

But the shift from some of Wall Street’s most closely followed names shows growing worry about potential pockets of distress. Paul Singer, who oversees one of the world’s biggest hedge-fund firms, $25 billion Elliott Management Corp., this week told investors that many markets could turn south with “head-spinning abruptness and shocking intensity.” (…)

But some cracks are starting to show: High-yield bonds in July suffered their biggest price declines in over a year, as lofty valuations and concerns about the potential for interest-rate increases drove a flight from funds that hold riskier debt. (…)

Most of the investors are placing targeted bets that aren’t necessarily bearish on the broader economy. Mr. Birnbaum, for example, is sticking with nearly $3 billion in bullish positions in residential-housing bonds, and he isn’t forecasting another wholesale collapse, according to a person familiar with his thinking. (…)

John Paulson, who famously earned $15 billion for his eponymous firm with bets against the subprime-mortgage market, is bullish on bank loans and mortgage-backed securities, as he has been for several years running, says a person familiar with the firm. Paulson & Co.’s main credit fund is up more than 8% this year. (…)

Junk Bonds Sink on Fears Rally Will End as Economy Picks Up Investors retreated from risky corporate debt, sending prices tumbling and deepening fears of an end to a long rally in junk bonds.

I have been warning about junk bonds for a while now. From Moody’s:

Higher Ratio of Debt-to-Profits Warns of Wider Spreads


The high yield market’s indifference to higher ratios of both debt and net interest expense to core profits may stem from expectations of rejuvenated core profits. It’s premature to dismiss an upbeat outlook for core profits. For example, Bloomberg’s estimate of a consensus forecast of operating income for the S&P 500’s 417 non-financial company members looks for an acceleration from Q2-2014’s prospective 9.3% annual increase to year-over-year growth of 12.o% for both Q4-2014 and Q1-2015.

However, getting to a 12% annual growth rate for the S&P 500’s operating income of non-financial companies may require an annual growth rate of at least 6% for the group’s sales. Nonetheless, for the 59% of the S&P 500’s non-financial companies that have already reported for 2014’s second quarter, sales growth of 5.5% yielded a 12.2% annual increase by operating income. However, sales growth is likely to become less productive in terms of profits growth if only because some of the major retailers have to report for the second quarter.

Is This The Much Awaited Market Pullback?
Buy-the-Dip Crowd Faces Big Test Buy the dip? Common wisdom says yes. Eye-popping numbers, like a greater than 300-point drop for the Dow Jones Industrial Average, are good for ominous headlines and bearish prognostications. But they also provide opportunities.

(…) Thursday marked the 10th time this year the Dow fell by at least 1% in a given day. In eight of the previous nine instances, the Dow regained those losses and traded higher within one month’s time. (…)

ISI surveys reveal that:

  • Institutional equity investors have become more bullish during the past year (57% last week from 50% in early 2013) but are sitting on their hands being only 65% invested, down from nearly 78% in early 2012 and 75% in early 2010. No conviction.
  • Hedge fund managers have a net exposure of 52.3%, only mid-way between max-short and max-long. No conviction.
  • The No-Bull Bull Market

The weekly bullish and bearish sentiment readings from the American Association of Individual Investors were released this morning, and they showed an equal amount of bulls and bears at 31.12%.  We’ve been writing about the lack of optimism from individual investors during this bull market pretty much since it began back in 2009, and our theory has been that after two 50%+ declines for the major indices over the last decade and a half, investors are understandably very suspicious of equities as an asset class.  No matter how high stocks go, any signs of short-term trouble cause sentiment to sour quickly.  At this point it seems like the healing process coming out of the financial crisis could take decades and not months or years.

To better illustrate the lack of optimism on the part of individual investors over the last few years, below is a chart of the rolling one-year average of the weekly AAII bullish sentiment reading going back to 1988.  Over the last year, the average weekly AAII bullish reading has been 37.95%.  This is about a point lower than the historical average weekly reading of 38.82% over the entire time period.  As you can see in the chart, bullish sentiment has been suppressed throughout this entire bull market going back to 2009, but it has really diverged from the S&P over the last two years.  Since mid-2012, the S&P 500 has been charging higher to new all-time highs, but bullish sentiment has remained very low and refuses to jump higher. 

No conviction. Where’s the bubble? In 2007, institutional equity investors were 63% bullish and  72% invested, hedge funds were 10% more exposed and the AAII bull ratio touched 70% late in 2007 and again early in 2008.

Here’s a group with high conviction:

More Than 80% of Russians Blame Ukrainian Army for MH17 Crash

A mere 3 percent of respondents to the poll bought into the Western version of events and pinned the blame for the July 17 disaster — in which nearly 300 people were killed — on pro-Russian separatists in eastern Ukraine. The overwhelming majority echoed the Russian government’s official line and pointed the finger at the Ukrainian military.