After a series of lackluster trading days, the indices finally trended a little higher on Friday: It seems that investors responded favorably to the fact that Capitol Hill is finally starting negotiations on the looming “Fiscal Cliff.” With a shortened work week this week that leads into Thanksgiving, I’m optimistic that it’ll be a matter of just days before investors finally wise up to the tremendous buying opportunities around us and liquidity improves.
Of course, in the meantime, we have an obstacle or two ahead of us, including the lingering effects of super-storm Sandy. Last week, for example, we received the latest batch of economic data from last month and it was clear that the power outages and damage caused by super-storm had an appreciable effect on the U.S. economy. Even so, there were several bright spots to the data that I don’t want to be overlooked, so I have the full details below.
In October, retail sales dropped 0.3%—the first such drop in several months and a reversal from September’s 1.3% gain. Auto sales and online purchases dropped by the most in a year. But excluding the hard-hit auto sector, retail sales remained unchanged. In fact, sales rose 1.4% at gas stations and grocery stores. And the drop was still less severe than the 0.4% forecast by economists. As with many of the economic reports from this week, Hurricane Sandy had a significant impact on retail sales in the Northeast. The overwhelming consensus is that retail sales will bounce back during the holiday shopping season, so I’m not concerned with this drop.
In October, consumer prices climbed by 0.1%—while food prices rose 0.2%, this increase was offset by a 0.6% drop in gasoline prices. Excluding the effects of these more volatile goods, core CPI ticked up 0.2%, higher than the 0.1% gain forecast by analysts. The biggest news was that the costs of shelter, namely rents, jumped 0.3%—the highest gain in more than four years. This largely aligns with the PPI report announced earlier in the week. It appears that businesses and consumers alike are contending with slightly higher prices, but we still haven’t hit significant inflation.
The Private Sector
Last month, the Producer Price Index (PPI) dropped 0.2%. This was unexpected as analysts predicted a 0.1% rise in October wholesale prices. Meanwhile, September PPI was upwardly revised to reflect a 1.2% gain—up from the earlier 1.1% reading. In October, PPI fell due to lower wholesale prices for gasoline and motor vehicles. However, wholesale food prices climbed 0.4%. We’ve seen the drop in wholesale gas prices trickle down to the consumer level, but the flipside is that we’ll probably have rising food costs at the supermarket to look forward to as well.
In September, business inventories grew by 0.7% to a record $1.6 trillion. This is above the 0.6% consensus estimate and represents and uptick from Augusts’ 0.6% growth. But what’s interesting is that when you exclude automobile stockpiles, inventories remained flat for the second consecutive month. Right now, business inventories are being outpaced by sales, which advanced 1.4% last month. As it stands, businesses have a 1.28 month supply on their hands. These data suggest that some business owners are still nervous, even heading into the holiday shopping season. Personally, I’d like to see stronger inventories, but I’m hopeful that the optimism that typically comes at year-end will improve sentiment in the private sector.
What It Measures: The index of industrial production measures the amount of output from the manufacturing, mining, electric and gas industries—several huge industries that literally power our economy.
In October, industrial production dipped 0.4%. This was somewhat unexpected as analysts expected production to remain flat and it represents a reversal from September’s 0.2% gain. Manufacturing, which is the largest component of industrial production, dropped 0.9%—the largest drop since May 2009. Once again, the main culprit behind the slowdown was super-storm Sandy, so I would wait until next month’s report to make any generalizations about the state of manufacturing in the U.S.
The Jobs Market
Last week brought a 78,000 surge in jobless claims—the biggest jump since April 2011. The 439,000 headcount was still less than the 475,000 claims forecast by economists, but it was enough to drive the four-week moving average up to 383,750. Meanwhile, last week’s jobless claims figure was upwardly revised from 355,000 to 361,000. While this jump would be shocking under normal circumstances, there is a reasonable explanation for this: Super-storm Sandy. The storm left millions of businesses in the dark for several days, so it’s understandable that we’d see a significant turnout from the Northeast region. That being said, I’ll watch this report in the following weeks to see if any new jobs trends emerge post-Sandy.
Let’s Look at This Week
Even though we’ll have a shortened trading week, we still have several public and private sector economic reports coming out next week, including existing home sales, housing starts and building permits as well as the index of leading economic indicators. As always, I’ll keep you up to speed on any market-moving news—you can find it all in this daily blog.