EC Weighing The Week Ahead: Is The Coast Clear?

The economic calendar is very light, and it is a holiday-shortened week. With the quadrennial CNBC switch to Olympic curling coverage after the market close, there is a little less air time to fill. What time and space remains will invite pundit opinion about last week’s stock rebound and the question: Is the coast clear?

Last Week Recap

My last edition of WTWA I predicted that inflation would be the key topic of interest and mused about whether it could spark another leg down for stocks. It was indeed a key question during the week and inflation ran a bit hotter than the Fed’s targets. For now at least, the level of inflation is not generating market fear. The effect on the rally lasted for only a few minutes after the CPI announcement.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the Doug Short design with Jill Mislinski updates and commentary. You can see many important features in a single look. She includes not only the price changes, but also volume and helpful callouts. The entire post includes a great collection of charts and analytical observations.

The gain for the week included a 5% trading range. Remember all those weeks when the range was only 1%? It was a time of abnormal behavior – a long time. A 5% move is also abnormal. The long-term average for the VIX is 19. In case you missed it last week, I posted What Investors Should Know about VIX.

Personal Note

I will be off next weekend. I will try to post an indicator update, especially if there are important changes. Mrs. OldProf is not joining me, giving her more time to play Words with Friends and enjoy her Valentine’s flowers.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news was mixed. Once again, the market reaction had little to do with the news flow.

The Good

NFIB small business optimism rose to 106.9. The survey preceded the decline in financial markets, but the strength is attributed to a more favorable business climate. HORAN Capital Advisors has a good report.

Port traffic, especially inbound, is strong (Calculated Risk).

Business inventories rose 0.4%, beating expectations of 0.3%.

Hotel occupancy rates are off to a solid 2018 start (Calculated Risk).

Homebuilder sentiment remains strong. (Bespoke)

Michigan sentiment was 99.9 on the preliminary report, which includes the period of the stock market decline. This solidly beat both expectations (95.5) and the prior month (95.7). Jill Mislinski’s report includes both analysis and great charts. She cites Richard Curtin, the economist in charge of the survey. His comments included the following:

Stock market gyrations were dominated by rising incomes, employment growth, and by net favorable perceptions of the tax reforms. Indeed, when asked to identify any recent economic news they had heard, negative references to stock prices were spontaneously cited by just 6% of all consumers. In contrast, favorable references to government policies were cited by 35% in February, unchanged from January, and the highest level recorded in more than a half century.

Housing starts registered an annualized rate of 1326K, beating expectations of 1240K and the (upwardly revised) prior month of 1209K. Total starts are now up 18.1% in the last two years and 7.3% in the last year (Calculated Risk).

Building permits also were strong at 1396K beating expectations and the prior month, both at 1300K.

Earnings news remains very bullish. A record number of companies are not only beating expectations but issuing positive guidance at a rate that is double the 10-year average (FactSet). Forward earnings growth is now 20% over levels from a year ago (Brian Gilmartin).

The Bad

Inflation

Core CPI of 0.3% was higher than the expected 0.2%. The December data was revised lower, from 0.3% to 0.1%
Core PPI of 0.4% represents an increase over a flat December report, but was in line with expectations. Jill Mislinski provides a helpful breakdown of sector changes over time.

Industrial production declined 0.1% and the December gain was revised from 0.9% to 0.4%. The decline therefore came from a lower base and still missed expectations. Steven Hansen (GEI) avoids seasonal adjustments. His year-over-year analysis of the three-month rolling average shows continuing improvement, especially in important sectors. Even the hungriest data nerds will enjoy and appreciate the charts and interpretation in the full post.

Retail sales declined 0.3% and December data was revised lower, from a 0.3% gain to only 0.1%. The decline missed expectations of 0.2% growth and started from a lower base than thought.

Bullish sentiment spiked. For the short term at least, this is seen as a contrarian indicator. (Bespoke). AAII bullish sentiment is up from 37% to 48.5%.

The high-frequency coincident indicators are turning mixed. New Deal Democrat’s exhaustive and first-rate update of indicators often highlights points that you might otherwise miss. This week he cites a mysterious drop in payroll withholding taxes, apparently more than new withholding rates would explain. He also notes the continued modest increase in M2, about 2.1%. Those who think the Fed is printing more money do not understand this, but economic growth requires a corresponding growth in the money supply. NDD has downgraded his economic “nowcast” to neutral.