The dynamics at work in the economy, markets, on Wall Street, in Washington, and around the world continue to be very much the same. Economic signals are decidedly mixed. The consumer and savers remain challenged. Markets remain firm. The greenback remains weak. Commodities remain firm.
Retail Sales: declined 1.5% but less than the expected decline of 2.1%. The media gave no credence to the fact that the prior month's figures were revised lower by .5 %. Over the last two months, retail sales are marginally positive but the coming holiday sales will be very challenging with heavy discounting still expected.
Consumer Price Index: rose .2 versus an expectation of .1. While prices are currently well behaved with the recent weakening of the dollar and sharp move higher in commodities, we should expect food and gas prices to move higher.
Jobless Claims: overall claims declined marginally again, but nobody is willing to bet that the employment situation is improving rapidly. The claims data is a sign that perhaps unemployment is stabilizing, albeit at very elevated levels.
Philadelphia Fed Manufacturing Report: registered at 11.5 versus an expectation of 12.5 and a prior month 14.1 reading. Not a sign of a robust rebound in activity.
Industrial Production: posted a surprisingly strong reading of a .7 increase against an expectation of a .2 increase.
Consumer Confidence: against an expected reading of 74.0, this report registered a significant disappointment of 69.4. What happened? Consumers are very nervous about the overall economic outlook.
Add all of this economic data up and I focus on the last comment about consumer confidence. The consumer, which represents 70% of our economy, is nervous and the economy as a whole is as well.
Let's move along to market performance. I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let's shift our focus accordingly.
Commentary: the overall U.S. Dollar Index continues to decline as the U.S. budget deficit for 2009 exploded to an astronomical $1.42 trillion. That figure is more than triple the 2008 level. The decline in the dollar continues to support the equity and commodity markets, while raising some concerns on the long end of the yield curve as a continuing decline in the dollar is inflationary which would push long maturity interest rates higher. The dollar actually did improve versus the Japanese yen while weakening versus the Euro. I recommend that readers focus on the dollar index which is why I link to it above. Track it and expect the index to move inversely to equities and commodities.
I reiterate my comments from last week. While I think Washington is not disappointed in a relatively weak dollar, although they should be ("Dollar Devaluation Is a Dangerous Game"), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.
Commentary: Unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington's weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.
The Baltic Dry Index did move higher this week following the upward moves in commodities, though, rather then leading the move.
I read these commodity tea leaves as a sign of inflationary expectations in these 'inputs' while we encounter deflationary pressures in wages and real estate.
Commentary: while the move by the Dow over 10, 000 did get a lot of attention and deservedly so, the number represents a psychological level more than any sort of meaningful fundamental development.
How about 3rd quarter earnings? More of the same. That is, generally speaking bottom line numbers are being generated to a greater extent by cost cutting than a real growth in sales and top line revenue. The weak dollar has supported those companies with a greater degree of international sales. Companies with pricing power should be able to benefit from the weaker dollar and improve their earnings. Those companies should outperform. Companies without pricing power will get squeezed and will continue to be forced to cut costs.
The yield curve steepened (longer maturities underperformed shorter maturities) a touch further again this week. I addressed my line of reasoning in the Currency Commentary. I continue to believe that we will have growing deflationary pressures (wages and real estate) offset by inflationary pressures (food, gas, health care). What's an individual to do? Save, grow your own food, ride a bike, and don't get sick!!
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains very well bid while other sectors of the bond market have started to give ground as interest rates have started to 'inch' higher. Of note, the municipal bond market gave considerable ground as the reality of pressures in municipal finance increase.
I reiterate, the game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as 'the greatest experiment' in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing 'dollar cost averaging' techniques.
Economy: Are We at the Beginning of the End?