This was the last full week of the summer when traders are still on vacation. In addition, the markets are closed on Monday, making Friday a de facto half day. And traders were obviously relieved to have an easy trading day on Friday given the stress caused by Katrina. The markets main advances occurred on Monday and late Wednesday because of declining interest rates and anticipation of rebuilding benefits. However, as the economic releases detailed below indicate, the underlying economic fundamentals are moving into marginal territory. In addition, Katrina's long-term effects are still in doubt, adding to traders concern about the future. Technically, the market is poised for a rally. The MACD and RSI indicators indicate the QQQQ's and SPY's are oversold and both are sitting near technically important Fibonacci retracement levels. However, Katrina also added a huge wild card to the whole equation, implying psychology may be more important than technical indicators for the coming week.
The bond market rallied this week on expectations the Fed would slow its pace of rate increases. The main thrust of the rallied occurred late Tuesday and into Wednesday morning. The main reason for the drop was the release of the Chicago Purchasing Managers index (see blow), which dropped to a level consistent with an economic contraction. In addition, Katrina's impact on oil prices will probably act as a natural brake on the economy as many economists feel $3/gallon is a psychologically important level that will slow consumer spending. The relative strength index and the MACD both indicate the bond market is approaching overbought levels, indicating a sell-off in the coming week would be more likely. The market closed near a 4.04 yield, which is slightly above the 62% retracement of the late June to early August rally.
Katrina's affect on US oil refinery production was the main story in the oil market this week. The Gulf of Mexico region is home to 10% of US refining capacity. Most of this capacity was still down at the end of the week, although reports were beginning to trickle in stating some refineries would restart over the next few weeks. Bush's announcement he would release oil from the Strategic Petroleum Reserve had little impact on oil prices because the lack of refinery capacity - not the supply of oil - was the market's main concern. Europe's announcement they would supply up to 30 days of refined oil to the US sent the market lower on Friday, as this announcement eased supply shortage concerns. Technically, the relative strength index and MACD imply the market is overbought. However, given the market is reacting to a natural disaster that affects the oil industry's fundamental supply and demand relationship, the importance of technical indicators should be considered but perhaps to a lesser degree for the next few trading days.
There appears to be a fundamental shift in the Forex market. It will take several weeks to for this to manifest, but the beginnings are clear. For the past few months, forex traders have focused on the growth and interest rate differentials between respective currencies. However, several US economic indicators were weaker than expected this week. The Chicago PMI (see below) was a major psychological blow to the dollar. Katrina's effects are causing traders to consider the possibility of a Fed pause, which would be a net dollar negative. Although the yen benefited slightly in terms of market psychology, its reliance on imported oil provides a ceiling on the benefit. The euro was the main beneficiary of the change. The dollar ended the week near unchanged versus the yen but down versus the euro. The markets will wait and see how Katrina affects the US economy. The more negative the impact, the more negative for the dollar.
Tuesday: Census Manufacturer's Shipments
New orders for manufactured goods in July decreased $7.5 billion or 1.9 percent to $387.8 billion, the U.S. Census Bureau reported today. This was the largest percent decrease in fifteen months and followed a 0.9 percent increase. Shipments, up for the third consecutive month, increased $2.9 billion or 0.7 percent to $389.3 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a slight increase in June. Unfilled orders, up for the third consecutive month, increased $5.7 billion or 1.0 percent to $580.5 billion. This was at the highest level since the series began and followed a 2.8 percent June increase. Inventories, up eighteen of the last nineteen months, increased $2.3 billion or 0.5 percent to $463.8 billion. This followed a 0.1 percent June increase.
Last week, the durable goods number dropped as well. However, that drop came after several months of large increases, indicating businesses were naturally slowing their purchases after several months of increases. The same may be true with new orders - businesses are simply slowing their purchases after strong activity in recent months.
Tuesday: Consumer Confidence
[Consumer Confidence] rebounded in August. The Index now stands at 105.6 (1985=100), up from 103.6 in July. The Present Situation Index increased to 123.6 from 119.3. The Expectations Index edged up to 93.7 from 93.2 last month." Despite the sharp increase in oil prices, "consumers' confidence in the current state of the economy, and particularly in the labor market, has propelled the Present Situation Index to its highest level in nearly four years (125.4 in September 2001)." In addition, "Those claiming business conditions are "good" increased to 29.8 percent from 28.7 percent. Those claiming conditions are "bad" slipped to 15.1 percent from 16.7 percent." Finally, people appear to be confident about the jobs market: "Consumers saying jobs are "hard to get" decreased to 23.2 percent from 23.8 percent, while those claiming jobs are "plentiful" rose to 23.5 percent from 22.9 percent"
This is a very solid report, and indicates people in general feel good about the economy and their respective future prospects. However, it seems to disagree with recent poll numbers that indicates a majority of voters disapprove of Bush's handling of the economy. I can't explain the reasons for the difference. In addition
Wednesday: Gross Domestic Product
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.3 percent in the second quarter of 2005, according to preliminary estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.8 percent.
The BEA revised this figure down from 3.4%. There was a big jump in durable goods of 7.7%. Although not confirmed by the figures, I would assume the US auto companies' big sales promotions had something to do with this. Gross private domestic investment dropped 3.3%. This is drop is disconcerting considering it increased 8.6% in the preceding quarter and drops typically happens during a recession. Exports increased 13.2% and imports increased .5%. Additionally, imports of goods decreased 1.1%. These figures may indicate better trade balance numbers next month.
Wednesday: Chicago Purchasing Manager's Index
The CPMI dropped from 63.5 in July to 49.2 in August. The new orders index dropped from 68.5 to 49.5. The production index dropped from 68 to 56. These are very large drops and indicate a change in purchasing policy to an economic slowdown.
Thursday: Personal Income and Expenditures
"Personal income increased $29.3 billion, or 0.3 percent, and disposable personal income (DPI) increased $27.2 billion, or 0.3 percent, in July, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $85.7 billion, or 1.0 percent. In June, personal income increased $54.7 billion, or 0.5 percent, DPI increased $45.9 billion, or 0.5 percent, and PCE increased $88.0 billion, or 1.0 percent, based on revised estimates.
Last month, people spent over three times what they received in pay. This is beyond terrible.
Thursday: Purchasing Managers Index
The PMI indicates that the manufacturing economy grew in August for the 27th consecutive month. The PMI for August registered 53.6 percent, a decrease of 3 percentage points when compared to July's reading of 56.6 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
What was disconcerting about this report was almost all of the major components of the ISM index dropped: New Orders -4.2, Production -5.3, Employment -.6% Supply Deliveries -1.3, Inventory -1.8, Exports -2.6%, Imports -1.3%. The report, in short, was fairly negative.
Friday: Employment Report
Nonfarm payroll employment increased by 169,000 in August, and the unemployment rate was little changed at 4.9 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment rose over the month in several industries, including construction, health care, and accommodations and food services. Manufacturing employment edged down in August.
Looking at the numbers in depth, the Bush trend continues. Manufacturing lost 14,000 jobs, Education and Health services gained 43,000 and Leisure and Hospitality gained 34,000. Construction gained 25,000. The areas of gains are cause for concern. Construction is largely dependent on the housing boom that won't last forever. Leisure/Hospitality are lower paying jobs (9.12/hour).