Category Archives: Karim

ISM (non-Mfg)

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(email exchange)

yes,

seems second quarter earnings should be better than expected and that costs are way down which will
add to profitability even with flattish sales.

and very wide net interest margins will support bank earnings growth even with low volume and continuing losses.

this can be a very good environment for stocks.


Karim writes:

Details a bit firmer than headline.

Overall, still contracting at a slower rate.



June May
Composite 47.0 44.0
Activity 49.8 42.4
Prices paid 53.7 46.9
New Orders 48.6 44.4
Employment 43.4 39.0
Export Orders 54.5 47.0
Imports 47.0 46.0

“Business has improved and holding steady.” (Arts, Entertainment & Recreation)

“Activity level is flat. Clients are delaying capital spending decisions.” (Professional, Scientific & Technical Services)

“Economy may be stabilizing. Second half looks more positive than first half.” (Information)

“Have begun spending government stimulus funding, and expect conditions to gradually improve in the near future.” (Public Administration)

“Occupancy levels continue to increase at a slow pace.” (Accommodation & Food Services)

“Activity is still slow and little has changed since last month.” (Wholesale Trade)


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CPI

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Karim writes:

No outliers.

  • Headline CPI up 0.096% m/m and -1.3% y/y; lowest y/y rate since 1950 will fall further over next 2mths before rising again in August.
  • Wild swings in headline from 5.6% to -2% in a 12mth period reinforcing Fed focus on core
  • Core up .145% m/m and 1.8% y/y
  • OER up 0.1%, med and education up 0.3%, tobacco down 0.3% after 20% rise in prior 2mths
  • Core likely to drift down to 1% y/y by yr-end


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ISM/Fed

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Karim writes:

Overall, manufacturing still contracting, but at a slower rate. Rebound in orders likely due to credit supply not being as sharp a constraint as it was in Q4 and inventory drawdown. Increase in backlogs suggests production may actually stop contracting in next couple of months. But with employment basically unchanged, it seems that this relative improvement is viewed by manufacturers as unrelated to longer-term timing and scope of recovery. Anecdotes below all over the place.

Looks to me like evidence the deficit spending is doing its job of relieving fiscal drag.

  • “Some amount of havoc is about to erupt, with companies pushing for increased capacity when suppliers have taken capacity offline.” (Computer & Electronic Products)
  • “Business is actually better than plan.” (Food, Beverage & Tobacco Products)
  • “Realistically, we don’t see any of our major customers looking to place business until mid-2010 at the earliest.” (Machinery)
  • “April was flat on sales. May looking better.” (Primary Metals)
  • “Business still trending downward, but not as fast.” (Chemical Products)



May April
Prices paid 43.5 32.0

Moving up with crude prices as reluctantly anticipated.



Production 46.0 40.4

Back towards ‘nuetral’ levels for flat GDP



New orders 51.1 47.2

Orders expanding some from a low base as expected.

This is enough for GDP to muddle through at modest positive levels



Backlog of Oders 48.0 40.5

Same



Employment 34.3 34.4

This will continue to stagnate as productivity gains will be sufficient to meet output demands



Export orders 48.0 44.0

Will move back up from depressed levels



Imports 42.5 42.0

Will move up with prices

This is good for financial markers/bad for obama vision — modest growth with continuing downward pressure on wages


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Durable Goods Order/Claims

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Karim writes:

Durable Goods Order/Claims

  • Durables goods orders +1.9% headline; -1.5% ex-aircraft and defense (this is the measure used for the private sector capex component of GDP)
  • Defense up 23.2% m/m; here are the prior 3mths for defense orders in 2009 (-11%;+33%;-40%)
  • Shipments ex-defense -0.3%
  • Inventories -0.8% (unexpected as most felt inventory drawdown was over in Q1)

  • Initial claims fall to 623k from 636k (revised up from 631k)

  • Continuing claims up another 110k

  • Data shows economy still contracting; look for range of estimates for Q2 from -2% to -4%

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Claims

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Karim writes:

Claims

  • Initial claims down to 631k (last week revised up from 637k to 643k)
  • Continuing claims up another 75k; up every week this year
  • Need to see initial claims (which represent layoffs) move back to 350-400k to signal no further job losses
  • Continuing claims reflect lack of hiring and is more correlated to unemployment rate as well as duration of unemployment


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Starts/Permits/Chain Store

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Karim writes:

  • Safe to say we have corrected for the 65.6% rise in multi-family starts in February as we have now had back-to-back months of -46.1% (today’s #) and -23.0%
  • Single family starts up 2.8% in April and overall starts -12.8%
  • Permits, a leading indicator of starts, -3.3% overall, +3.6% single family, and -19.9% multi-family
  • Single family starts -45.6% y/y and multi-family -72.3% y/y

  • Chain store sales look down about 0.2% m/m so far; important as May represents peak month for stimulus measures as it relates to personal income

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Japan Data/Outlook

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Karim writes:

In my years of following G7 economies, I have never seen weaker data than we have had in Japan in recent months.

Today’s data:

  • Industrial production -9.6% in December (record monthly fall), following up on -8.5% m/m in November and industry projecting -9.1% in January.
  • Moreover, the ratio of inventories to shipments rose 6.5% for the month and is now up 33.5% yr/yr.
  • Tokyo Core CPI also went back into negative territory in January (-0.3% yr/yr).

  • The weakness in manufacturing thus far reflects the collapse in demand from China and the U.S. (exports down 35% yr/yr).
  • As production cuts lead to higher layoffs, the next leg down will be in private consumption.
  • Most dealers are now forecasting back to back -10% quarters for real GDP in Q4 and Q1.
  • With the current government on the ropes and April legislation that may lead the yen even stronger, the prognosis past Q1 doesn’t appear very good.


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FOMC

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Karim writes:

Surprise dissent from Lacker who would rather buy Treasuries than utilize the current slew of credit programs (didn’t realize there could be dissents as it related to type of non-traditional easing).

Other notes:

  1. Economy has gotten worse since December
  2. Risk of inflation falling and persisting to unfavorably low levels has increased
  3. Significant downside risks to growth remain

JANUARY MEETING

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

DECEMBER MEETING

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.


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NFP: 13.5%!

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From Karim:

Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force:

This measure rose from 12.6% to 13.5% in December. It was 8.7% in December 2007.

As for NFP/UE:

  • -524k; net revisions -154k
  • Unemployment rate rises from 6.8% to 7.2%
  • Hours fall another 1.1% (negative for production and a precursor to more layoffs)
  • Average duration of unemployment up from 18.9 weeks to 19.7
  • Diffusion index down from 27.2 to 25.4
  • Manufacturing (-149k), construction (-101k), temp help (-81k) and retail (-67k) lead the way lower.


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