The DIA's (DOW) were up 1%, the SPY's (S&P 500) were up 1.6% and the QQQQ's (NASDAQ) were up 4%. This week saw some strong economic numbers. Retail sales were very strong. In addition, personal income increased and the service sector looks solid. Greenspan's testimony also bolstered the bulls run. All of these combined with a good earnings season added to this week's advance. The bulk of this week's advances occurred on Wednesday and Thursday.
The 10-year bond rose 7 basis points in yield this week, closing at 4.55%. The Fed's interest rate policy and US economic growth are the central stories of the bond market. Economic strength implies an increased possibility of inflation. Recent hawkish statements by Federal Reserve Presidents reinforce this perception. In addition, there is no indication from the Fed they are done raising interest rates. This makes currently issued bonds less attractive because a newer issue will have a higher yield. Finally, considering the strong week for stocks, some money probably flowed out of the bond market and into this week's rally.
Oil was unchanged for the week. Oil appears to be comfortable trading in the $58-$62 range after the hurricane price spike. For the oil market bears there are reports of a 2% droop in consumer demand caused by earlier price spikes in oil. In addition, warmer weather in the NE has decreased overall demand. Finally, oil inventories increased 2.7 million barrels this week. For the bulls, there is strong US growth as evidenced by last week's GDP numbers and this week's retail sales figures (see below). In addition, 50% of gulf oil refining and 45% of gulf gas refining is still off-line. Should there be a cold snap, bulls could bid-up oil because of the very tight winter heating fuels supply.
The dollar rose 2.25% versus the yen and 2% versus the euro this week. For the last 6 months, the growth and interest rate differentials between the US, Japan and Europe have been the central themes to currency markets. This week was no exception. This week, the US produced strong economic numbers (see below), Greenspan gave an upbeat assessment of the economy, US interest rates increased, and the European Central bank did not raise rates as expected. As a result, the dollar rose versus its competitors.
Monday: Personal Income:
Personal income increased $173.5 billion, or 1.7 percent, and disposable personal income (DPI)increased $171.2 billion, or 1.9 percent, in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $44.1 billion, or 0.5 percent. In August, personal income decreased $94.9 billion, or 0.9 percent, DPI decreased $95.4 billion, or 1.1 percent, and PCE decreased $48.4 billion, or 0.5 percent, based on revised estimates.
Overall inflation increased 1.2% in September, making the personal income gain .5% and the disposable income gain .7%. Goods-producing industries wages dropped slightly while service and government sector wages increased. Since February, employer contributions for "supplements" (pension, insurance and government social insurance) have increased 3.42%, while wages for the same period increased 2.84%. For the fourth month in a row, consumption exceeded income, making overall savings negative. Finally, government payments to individuals increased 1.2%. For the last year, this total number was between 1,460 billion and 1,480 billion. Last month it was 1,494 billion. This most likely represents government payments related to hurricanes.
Monday: Chicago Purchasing Managers Index:
The overall business barometer increased slightly from 59.3 to 60.7. New orders and order backlogs increased, showing strength. Inventories decreased. Assuming there is a desire to restock the inventory depletion, this is also a sign of strength. However, like other recent manufacturing surveys, the prices paid component increased. This will likely add to pressure from various inflation hawks on the Federal Reserve to continue interest rate increases.
Tuesday: Construction Spending
Total construction spending increased .5% from September to October.
Residential construction accounted for the entire increase. Private non-residential construction decreased, as did public construction. New housing starts from a few weeks ago were entirely skewed to the south, indicating the increase is likely do to hurricane reconstruction.
Thursday: ISM Service Survey
Non-Manufacturing Business Survey Committee and coordinator of the Supply Chain Management Program, University of Houston-Downtown. "Non-manufacturing business activity increased for the 31st consecutive month in October," Kauffman said. He added, "Business Activity increased at a faster rate in October than in September. Order Backlogs and New Orders also increased at faster rates, but Employment increased at a slower rate. Eleven of 17 non-manufacturing industry sectors report increased activity in October compared to eight that reported increased activity in September. Concern about the continued high level of energy prices and its impact on economic activity is again the number one topic on which survey respondents commented. Respondents also commented on Hurricanes Katrina and Rita and their impact on the energy supply and on the availability and cost of construction materials and truck transportation. The overall indication is continued economic growth in the non-manufacturing sector in October, but with a high level of concern about the impact of energy prices."
This was a very solid report. Unlike other market surveys, the prices paid component dropped slightly, which is good news. Over 80% of commodities used by services were up in price. Also important is export orders increased, while imports remained constant. Although services are a small portion of the trade deficit, every little bit helps.
Thursday: Productivity
From the second quarter to the third quarter of 2005, productivity in the business sector grew at a 4.8 percent seasonally adjusted annual rate. Output increased 4.3 percent, while hours of all persons engaged in the sector declined 0.4 percent. The third-quarter productivity increase was much faster than the 0.8-percent gain recorded in the second quarter of 2005 (as revised), which reflected a 4.0-percent rise in output and a 3.1-percent rise in hours. (tables B and 1).
Although the report stated "The effects of Hurricanes Katrina and Rita, which struck the Gulf Coast during the third quarter, could not be separately identified in the productivity and costs measures" it appears the hurricanes probably had a positive impact on this number. Productivity is essentially amount of goods produced per hour worked. The macro-economy lost an entire city of hours worked last month in the national productivity figures. That drop should have a fairly profound impact on the calculations.
Thursday: Same-Store Chain Sales
Year-Over-Year same store sales rose 4.4% in October. The month-over-month increase was 1%. Both of these numbers are strong and reflect a strong consumer spending climate. General merchandise stores increase 4.6%, drug stores 5.3%, and specialty apparel and goods increase 2.8%.
Thursday: manufacturers, shipments, inventories and orders.
New orders for manufactured goods in September decreased $6.8 billion or 1.7 percent to $390.0 billion, the U.S. Census Bureau reported today. This followed a 2.9 percent increase in August. Shipments, down following four consecutive monthly increases, decreased $2.0 billion or 0.5 percent to $393.0 billion. This followed a 2.1 percent increase in August. Unfilled orders, up five consecutive months, increased $4.2 billion or 0.7 percent to $594.1 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 1.6 percent August increase. Inventories, down two consecutive months, decreased $0.4 billion or 0.1 percent to $462.7 billion. This followed a 0.2 percent August decrease.
These numbers ebb and flow. So long as the movements are not extremely negative, drops in the overall numbers should be read as a natural pullback from previous expenditures. These numbers are definitely in the natural pullback category and should be read as entirely natural in the time-line series. Inventories are a less reliable indicator as more and more businesses have lowered their overall inventory levels.
Friday: Employment Report
Nonfarm payroll employment was little changed (+56,000) in October, and the unemployment rate was essentially unchanged at 5.0 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Average hourly earnings of production or nonsupervisory workers on private nonfarm payrolls rose by 8 cents over the month.
This number was very weak. Of particular concern is the over-reliance on construction jobs which accounted for 33,000 for 58% of the increase. On the good side, manufacturing jobs increased as well, adding 12,000 jobs. For those of you who want to note the household numbers, please go here to find out why that measure is wrong.
