Caton's Corner - January 2014

Many, including me, subscribe to the view that US economic growth will accelerate in 2014, if only because fiscal drag will be less than in 2013. Let’s just say that view has had little support from the data so far this year. It was, in any case, a remarkably slow week for macro-economic news. It was a poor week for the share market, mainly because of concern about global growth and lacklustre earnings reports.

There were no data at all until Wednesday (Monday was a public holiday). Driven by lower interest rates, mortgage applications rose for the third successive week in the week ended 17 January. The overall index increased by 4.7%, due to a 9.9% jump in refinancing (also the third consecutive monthly gain). Applications for a purchase, on the other hand, declined by 3.6%. In the past year, in trend terms, purchase applications have weakened by about 7.5% while refinancing is down by about 65%. Both the 30-year fixed rate and the five-year adjustable declined for the second week in succession. The 30-year fell from 4.66% to 4.57% while the 5-year declined from 3.28% to 3.23%.

On Thursday, there were two more pieces of housing data. The FHFA purchase-only house price index rose by just 0.1% in November, thus bringing its year-to rate of change to 7.6%, from 8.2% in the year to October. The index remains 8.9% below its April 2007 peak. In the month, the index fell in three of the nine major Census regions, led by a 1.4% decline in the East South Central. In the past year, the index has risen everywhere, with the range being from 3.2% in the Middle Atlantic to 15.4% in the Pacific region. The index is at an all-time high in the West South Central region, but elsewhere down from the peaks by between 1.3% in the West North Central and 21.9% in the Pacific region. House prices continue to rise, but at a decelerating rate.

One reason for this would be the recent softness in existing home sales. They rose marginally in December, from a downwardly revised 4.82 million units (previously 4.90 million) to 4.87 million. This is the first increase after three monthly falls. By region, the monthly performance was mixed, with sales rising in the South and West but declining in the Northeast and Midwest. In the past year, sales have fallen by 0.6% (see chart). The median house price is up by 9.9% in the past year. Although this is higher than the 9% recorded in the year to November, it is down from 13.4% as recently as August. The inventory of homes for sale dropped by 9.3% in the month, with the result that the inventory/sales ratio tightened from 5.1 months to 4.6 months.

US Existing Home Sales

Jobless claims rose only marginally in the week ended 17 January, from 325,000 to 326,000. They may have been held down by the extreme winter weather experienced in much of the country. In unadjusted terms, claims fell from 533,000 to 412,000. The four-week moving average fell from 335,000 to 332,000, a six-week low (see chart). Continuing claims rose from 3.02 million to 3.06 million, the third successive weekly rise and the sixth in the past seven weeks.

US Initial Jobless Claims - 26/01/2014

The Conference Board index of leading indicators rose by just 0.1% in December, slightly below expectations. The increase in November was revised up from 0.8% to 1%. Five of the 10 components rose, compared with eight in November. The index was held up by the financial components, while declines in building permits and in consumer expectations weighed on it. The six-month annualised growth rate slipped from 8.6% to a still-robust 7%.

The Chicago Fed national activity index, which aggregates more than 80 data series relating to the “real” economy, fell from 0.69 in November to 0.16 in December, with the three-month average thus declining from 0.35 to 0.32, still consistent with above-trend growth. The six-month average improved from 0.11 to 0.17, the highest it has been since early 2006, at least according to my eyeballs.

The oil and products inventory data showed the first increase in crude stocks in eight weeks. After a cumulative fall of 41.2 million barrels, more than 10%, crude stocks rose by 1 million barrels in the week ended 17 January. Crude imports rose in the week while refinery demand fell. Gasoline stocks also rose, by 2.1 million barrels, their eighth build in the past nine weeks. Distillate stocks fell for the second week in succession, by 3.2 million barrels. In the past year, crude stocks have fallen by 3.3% and distillate stocks by 9.2% while gasoline stocks have risen by 0.9%. Refinery utilisation fell sharply, from 90% to 86.5%. �

The Week Ahead

On Monday, new home sales for December are expected to decline by 1-2% from their November level of 464,000. On Tuesday, durable goods orders for December should show a further solid gain of at least 2% after a 3.4% increase in November. Once again, civil aircraft will be mainly responsible so-called core orders are likely to show a far smaller gain. The Case/Shiller house price index for November is likely to show continued healthy growth. The Conference Board measure of consumer confidence for January may decline only slightly from its December reading of 78.1.

On Wednesday, the FOMC meeting will take place. Attention will be paid to any alteration to the prospective taper, and to any rhetoric pertaining to forward guidance. On Thursday, jobless claims should stay close to their current level of 325,000. The first estimate of Q4 2013 GDP growth is likely to begin with a 3, and may hit 3.5%. Inflation will continue to be a non-issue. Pending home sales for December should be close to flat.

On Friday, the personal income and spending data for December will be released. Bear in mind that this only gives a monthly breakdown of the quarterly numbers in the GDP release the day before. The Chicago PMI for January may well fall from 60.8 in December, to about 58. Finally, the full-month estimate of consumer sentiment from the University of Michigan will stay close to its early estimate of 80.4.

Market Reaction

The share market landed with a sickening thud on Friday, apparently concerned more about the rest of the world than about the US economy. On the day, the major indexes fell by 2% or more. For the week, the Dow was down by 3.5%, the S&P by 2.6% and the Nasdaq by 1.7%. The first two of these are now at their lowest levels since 17 December last year. The decline in the Dow was its biggest weekly loss since mid-May 2012. We think this is overdone, and that the trend remains upwards.

S&P500 - 26/01/2014

The long end followed the share market with the 10-year yield falling by 9 basis points over the course of the week, to its lowest level since 28 November last year. We have no big call for the week ahead.

US 10-year yield - 26/01/2014