All Things in Moderation

Stocks are lower this morning as emerging markets fall. Bonds and MBS are flat. Overnight, China intervened in the f/x markets to support the yuan. China’s surprise devaluation in August was the catalyst for this whole sell-off.

Remember, when you read the words “Chinese supporting the yuan” think one thing: Treasury sales and increasing interest rate. The Chinese support the yuan by selling dollars, and the way they sell dollars is by selling Treasuries.

Brazil was downgraded to junk by S&P yesterday. This is part of the reason why emerging markets are heavy this morning. This move was expected eventually, however the speed in which it happened was surprising. Does this put a bid under Treasuries? Nope.

Import prices fell 1.8% in August and are down 11.4% year over year. A strong dollar is depressing commodity prices and making imports more cost competitive.

Initial Jobless Claims came in at 275k, a drop from 281k the week before. People who have jobs are generally keeping them.

The Bloomberg Consumer Comfort Index was flat at 41.4 last week. 2/3 have a negative view of the economy. while 55% have a positive view of their own personal financial situation.

Wholesale inventories fell 0.1% in July, while wholesale sales fell 0.3%. The inventory to sales ratio, which can be considered a leading indicator for a recession is at 1.3x, an elevated reading. This would signal a recession is a possibility.

The current continuing resolution to keep the government open expires at the end of the month. Government shutdown talk will undoubtedly escalate as the two sides posture over funding Planned Parenthood.

To its proponents, Keynsianism cannot fail, it can only be failed. Dr. Cowbell is worried that Abenomics will fail in Japan. Of course Japan has followed the Keynsian playbook to the letter for 25 years and has had no growth and a debt to gdp ratio of 2.2x to show for it. Whenever you hear people saying: we need to spend big on infrastructure to put people to work and get the economy going again, remember they are basically putting the old New Deal / Japanese wine in a new bottle.

Stocks are higher this morning on overseas strength in equity markets led by Japan. Bonds and MBS are down.

Mortgage Applications fell 6.2% last week, with purchases falling 0.9% and refis falling 9.9%.

Job openings hit a record in July, with the JOLTS job openings hitting 5.7 million. Compare that number with the number of unemployed at 8 million. The quits rate (which is a measure of economic strength) has been unchanged for the past year however at between 2.7 million and 2.8 million. It seems surprising to see a labor force participation rate at 38 year lows, job openings at highs, an unemployment rate at boom time levels, and almost  no real wage growth. It speaks to a mismatch between what business wants and who is available.

Chart: JOLTS job openings:

Citi is forecasting a better than 50% chance of a global recession in the next couple of years. This will be led by emerging markets and China. While that doesn’t necessarily mean the US will head into a recession, it does mean that there will be little to no upward pressure on interest rates. The biggest risk to the US is a sharp increase in the US dollar, which will hurt exporters. The policy response to a recession will be limited – monetary policy is already at pretty much full stimulus. Much more worrisome however, is the fact that protectionist policies are gaining in popularity.

Homebuilder Hovnanian reported earnings this morning. Deliveries fell 3.8% compared with last year. Gross margins were down as well. Contracts did expand however, to almost 20%. It seems like the builders in general had a bit of a lull in deliveries over the summer, but almost all reported bit increases in contracts and backlog. We are entering the slow season for the builders, which lasts about as long as football season. While I sometimes feel like Linus in the pumpkin patch, 2016 could be a big year for the builders. Would be nice to get housing starts back around historical levels of 1.5 million or so.

Larry Summers is out with another editorial which lays out the case for keeping rates at zero. His argument is that credit spreads have widened (which means the interest rate companies have to pay to borrow) has increased over the past month and that in of itself constitutes a tightening. David Stockman (Reagan’s budget director) was on Bloomberg Radio this morning excoriating the “clowns at the Fed” for not having raised rates already. His point is that the unemployment rate is in the middle of the range of what the Fed considers full employment. In fact, the 5.1% unemployment rate is in the bottom quintile of unemployment rates over the past 40 years.

Stocks are lower this morning on overseas weakness. Bonds and MBS are up. Slow news day.

China has given up on using state funds to support its stock market. The government has spent about $200 billion trying to support the stock market.

The highlight of the week will be the jobs report on Friday. This will be the last jobs report ahead of the September FOMC meeting. After last week’s market sell-off, the Fed Fund futures contracts took their assessment of a Sep hike from around 50% to about 30%.

Aside from the jobs report, we have some important economic data this week with the ISM surveys and construction spending. That said, the jobs report will be the big event.

The ISM Milwaukee Index came in at 47.67, a bit lower than expectations.

The Chicago Purchasing Manager’s index was almost flat at 54.4.

Stanley Fischer made some hawkish comments in Jackson Hole on Friday, which is what stopped the rally in stocks.

Stocks are taking a breather after a big two-day rally. Bonds and MBS are up.

Personal Income rose 0.4% in July, in line with expectations. Personal Spending rose 0.3%. The Core PCE Index (The Fed’s preferred measure of inflation) rose at 1.2% YOY. Nice to see a little wage inflation. On the other hand, the low PCE inflation is going to worry the Fed.

Note that the National Labor Relations Board just issued a pro-union decision to make a company that hires a temporary agency for workers a joint employer. This will supposedly make it easier for workers to unionize and it makes the ultimate employer liable for what happens to temps. This was considered a big win for the unions. Does it ultimately result in higher wages, or simply more campaign cash for Democrats? I am betting on the latter.

St. Louis Fed Head James Bullard says that the recent volatility in the markets isn’t going to be much of a factor in the FOMC’s decision-making next month. The Fed Funds futures however discounted the probability of a Sep rate hike from about 50% to about 30%.

Pending Home Sales rose 0.5% in July. The real estate market is inching better, but tight supply and affordability issues are holding things back a little.

Consumer sentiment fell in August, according to the University of Michigan. The 91.9 reading came in below expectations.