Philadelphia Fed Business Outlook Survey Lowest Since March

Philadelphia Fed Business Outlook Survey has become a front and center report for traders because of the serious structural problems in the manufacturing sector due to the rising U.S. dollar.

The consensus range for the Philadelphia Fed Business Outlook Survey was 9.0 to 18.9, the actual number, 5.7. This is the lowest level since March.

Philadelphia_Fed_Survey(1)

Folks, the Federal Reserve’s transitory thesis is dangerously close to being a bust. The slow down in general business conditions during the first half of 2015 is not yet abating. I think we give this one more month to see if overall conditions improve before we call the Federal Reserve wrong on their transitory thesis.

Notice how the S&P 500 sold off at 10:00 AM when the Philadelphia Fed Business Outlook Survey was released today:

spy-day-trading

Just how bad was the Philadelphia Fed Business Outlook Survey? New orders came in less than half of last month. New Orders were 7.1 versus 15.2 the prior month. Employment also contracted coming in at -0.4 versus 3.8 the prior month.

In this survey, firms were asked to assess the importance of seasonal factors in monthly production, seasonal changes in their production by month, and whether these seasonal factors have changed in importance over time. Firms reported seasonal increases in production in the spring and during the fall as well as a decrease in activity in mid-summer and during the winter months.

To review, traders follow this survey as an indicator of manufacturing sector trends. It is correlated with the ISM manufacturing index and the index of industrial production. The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behavior.

Retail Sales FAIL, Shows Consumer Weakness

The Retail Sales report was a colossal failure today. Suddenly, Q2 2015 does not look very strong as retail sales for June show broad weakness. Retail sales came in way below expectations, at -0.3 percent. The revisions were bad as well. May 2015 was lowered from +1.2 percent to +1 percent, and April was lowered to 0 percent from 0.2 percent. That’s a cumulative -0.7% shaved off the GDP in the last 3 months, that traders just found out about in today’s report.

After June’s disappointing employment report and drop in small business confidence, the weak retail sales data suggests the economy might have lost momentum at the end of the second quarter.www.cnbc.com

The fall in restaurant sales confirms the consumer weakness and bucks the idea that high consumer confidence is pointing to future consumer strength as the Federal Reserve has been saying. The Fed’s transitory thesis is in serious jeopardy of being nullified after the disappointing employment report, drop in small business confidence, and now the weak retail sales report for June.

This is a disappointing report that will likely lower Q2 GDP estimates which will likely push back the outlook for the Fed’s first rate hike from September to December.

Retail_Sales

With the revisions and today’s -0.3 percent number, the retail sales chart above has formed a much more bearish lower high and now we are in the midst of a lower swing low. That is not indicative of a strengthening consumer. This is flies in the face of the Federal Reserve’s transitory thesis where the slow down in the U.S. economy was only something that primarily took place at the start of 2015.

To review, sales are by retail and food services stores. Retail sales measure the total receipts at stores that sell merchandise and related services to consumers. Data are collected from the Monthly Retail Trade Survey conducted by the U.S. Bureau of the Census. Retail sales cover the durables and nondurables portions of consumer spending.

Stock traders track consumer spending because it accounts for more than two-thirds of the economy. If you know how the consumer sector is doing, you will have a pretty good handle on where the economy is headed. That is a huge advantage for traders.

S&P 500 Overnight Futures Moving Higher on Alcoa Earnings

Alcoa kicked off earnings season, reporting earnings today after market close. Notice what happened to S&P 500 futures immediately following Alcoa’s earnings report after market close:

alcoa-sp-futures

Alcoa reported second-quarter revenue of $5.9 billion compared with the estimate of $5.8 billion from analysts surveyed by FactSet. Alcoa missed on earnings coming in at 19 cents per share instead of the 22 cents estimate. Still, this was the best first half profitability since 2007.

Alcoa reaffirmed FY15 global aluminum demand growth of 6.5%. Alcoa continues to project steady growth in 2015 across the majority of its end markets.

In the aerospace sector, Alcoa expects global sales growth of 8% to 9% in 2015. Projections for 2016 and 2017 aerospace sales growth have nearly doubled to 8% to 13%, from the previous 4% to 5% estimate. This suggests growing strength in the sector.

Alcoa sees increasing orders in the North American heavy duty truck and trailer market, and projects 9% to 11% growth for 2015, up from the previous forecast of 6% to 8% growth.

Alcoa CEO Klaus Kleinfeld said, “Our value-add businesses are outperforming, with record profitability in the downstream and exciting profitable growth in the midstream. Recent acquisitions are fully on track, and paired with our innovations we are cementing Alcoas position as a premier aerospace and automotive partner. In the upstream, our Alumina business delivered its best first half since 2007 and our lower cost metals business showed resilience in the face of strong market headwinds. Productivity and cash generation were excellent.”

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FOMC Minutes Show Fed Worried About Greece

The FOMC Minutes from the June 16 and 17th meeting shows that the Federal Reserve expressed worry over Greece.

“[M]any participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States.”

Respect to the Fed for calling that one early.

The Fed also noted that stock markets across the euro area had declined since their last meeting in April.

Most FOMC members wanted to see greater employment growth and upward pressure on inflation before hiking rates. Members cited uncertain risks tied to Greece and China, risks that have since grown.

The fundamental financial reports since the June meeting are not locking in expectations for a September rate hike. The employment report for June was weak as were June vehicle sales. Greece and China are pulling down the U.S. stock market. June’s minutes seem more dovish than hawkish thus the outlook for the rate hike appears to be shifting more toward December than September.

Employment Situation Soft In June But Bigger Picture Looks Hot

June’s employment report came in at 223,000 and had downward revisions totaling 60,000 to the two prior months (May revised to 254,000 from 280,000 and April to 187,000 from 221,000).

This was a bit on the soft-side folks and I think everyone is a little disappointed as the hope was for a blockbuster June. June is normally a seasonally strong month for labor force growth, as many new graduates and summer workers enter the labor force. Over the past sixty years, the labor force has grown by 1.8 percent in June on average before seasonal adjustment—more than three times faster than May, the next fastest month. But this June, the labor force only rose 0.4 percent. The labor force contracted on a seasonally adjusted basis, reducing the labor force participation rate.

Although total job growth was revised down in April and May, much of the revision is attributable to lower government employment than previously estimated.

Here is an updated chart with the June number and the downward revisions to the prior two months:

Employment Situation

Folks I’m really not concerned about the chart above. We had a big swing move up for April and May, and now we’re swinging down and where the cycle low is put in will be key. I understand that June is usually a great month but this year it was not. However, let’s not let our emotional state of disappointment cause us to lose sight of the bigger picture.

Bigger Picture Economic Trends

– Our economy has now added 5.6 million jobs over the past two years, the strongest two-year job growth since 2000.
– The private sector has added 12.8 million jobs over 64 straight months of job growth, extending the longest streak on record.
– On the whole, our economy has added 2.9 million new jobs over the past twelve months.

employment situation report chart

Let’s review what the Employment Situation report is, and why investors and traders follow it so closely.

The unemployment rate in the Employment Situation report equals the number of unemployed persons divided by the total number of persons in the labor force. This comes from a survey of 60,000 households (this is called the household survey). Workers are only counted once, no matter how many jobs they have, or whether they are only working part-time. In order to be counted as unemployed, one must be actively looking for work.

The Employment Situation report is a good way to gauge the current state as well as the future direction of the economy. Nonfarm payrolls are categorized by sectors. The “smart money” uses this sector data to determine which sectors to invest in. But it’s not just the “smart money” that follows this report closely, the Federal Reserve does too.

When job growth is slow or negative, the Federal Reserve is more likely to lower interest rates. The Employment Situation report provides statistics and insight on wage trends, and wage inflation. The Federal Reserve closely monitors this data watching for even the smallest signs of potential inflationary pressures. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is more likely to raise interest rates.

Consumer Sentiment Explodes To Highest Reading Since 1991!

The Consumer Sentiment report was crazy-awesome folks. The expectations component hit 97.8 for a 12-year high and a 13.6 point surge from May. The 13.6 gain is the biggest monthly gain since March 1991!

One thing is clear, the consumer is upbeat and is earning more and spending more. This supports the Federal Reserve’s thesis that the economic slowdown in the first half of 2015 was just a transitory phase.

Consumer sentiment

As stock traders, we track the Consumer Sentiment report because it is consumer psychology that is a key influence on stock and bond markets. Consumer spending drives two-thirds of the economy and if the consumer is not confident, the consumer will not be as willing to spend. Consumer confidence impacts consumer spending which affects economic growth. Strong economic growth translates to healthy corporate profits and higher stock prices.

Consumer confidence soared during the 1990s and stock traders enjoyed huge gains during that time. Consumer confidence turned down with the stock market between 2000 and 2002, and then recovered in 2003 and 2004. In 2008 and 2009, the global financial crisis and Bear market caused confidence to plunge right along with consumer spending and the stock market.

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Consumer Spending Rises the Most in 6 Years!

The U.S. consumer came on strong in May with a 0.9% surge in personal outlays. Spending was the heaviest in autos and retail goods.

The surge in spending was supported by a 0.5% rise in personal income.

This is the largest increase in consumer spending in almost six years! This supports the Federal Reserve thesis that the slowdown in the U.S. economy for the first half of 2015 was transitory in nature.

Personal Income and Outlays

Stock traders track consumer spending because it makes up more than two-thirds of the economy. If you know what consumers are up to, you will have a better chance of predicting where the economy and stock market is headed. The “smart money” also uses the Personal Income and Outlays report to see how consumers are directing their spending, whether they are buying durable goods, nondurable goods, or services. That gives “smart money” a big “early mover” advantage in terms of which companies’ shares they will buy.