The Practical Economist

ECONOMIC & MARKET ANALYSIS - July 17, 2017

Economic & Market Analysis

Latest Economic Indications

S&P 500 Index - The Index finished at 2459.27, up 1.4% over last week.

US Dollar Index - The Index finished at 95.11, down 0.9% from last week.

Gold - Gold finished at 1218.90, down 0.5% from last week.

Commodities - The Index finished at 82.70, up 1.1% from last week.  

10-Year Government Bond Yield - The yield finished at 2.33%, down 6 basis points from last week.      

This is not the week (or fortnight) to over-read into the economic data.  You want the take-away from 10,000 feet?  The data came in satisfactorily.

Let's start with the labor market.  Employment continued to grow, with the figure of Net Newly Employed having grown 140,000 last month.  That translates to the ranks of the employed rising at a 1.3% annualized rate.

Make no mistake: these are good numbers, but they're not consistent with the language Fed Chair Yellen uses when she characterizes the economy as being at full employment.  That's decidedly untrue: the Employment Rate is unchanged over last month, at 60.3% and is about two percentage points shy of being able to be characterized as being at full employment.

Remember Yellen's remarks.  She is not a person who speaks casually.  When she intentionally mischaracterizes the labor picture, you can be certain that she's setting listeners up for something.  Pay very close attention to the next press conference she gives.

Industrial Output data got released late in the week and the data continues to be...interesting.  The good news--and possibly inflationary news--is production rose 1.4% last month.  The 12-month rolling average Index is at 103.6.  That figure is mildly good.  However, it is roughly the same level as that of July 2008.  If you remember July 2008, the economy was slowly up very quickly at that time.  Now let's look at Factory Utilization.  It's the highest it's been since July of last year, but...if you look back before that it's the lowest it's been since September 2011. 

In other words, we think the conclusion that inflationary forces are rapidly gathering is very premature.

And that takes us to Retail Sales.  Core Retail Sales, adjusted for inflation rose 9.4%...and that's a very high figure, but...it's very misleading and reflecting a spike in Sales that occurred three months ago.  In fact, unadjusted for inflation, Core Sales rose a very moderate 3.0% last month.  That's the slowest increase since November.

Are we trying to make you conjure a tough picture in your mind?  No!  We're trying to ensure you conjure a realistic picture.  Keep in mind our short-term forecast: it's not a picture of contraction so much as one of gentle softening.

And that takes us to the market's reaction to the week.  In preparation for discussing what the market did, have you taken a look at the market's chief week-ending indicators, above?

First let's dispose of a couple of minor observations.

1.  Notice that decline in Gold in the face of a lower Dollar?  What that tells you is that the Market is decidedly not too concerned about inflation in the short-term.

2.  See that higher commodity index figure in the face of a lower Dollar?  That is completely intuitive and nothing to particularly get exercised about.

What you really what to pay attention to:

1.  The long-term bond yield is slightly lower in the face of an unchanged Fed Funds rate.

2.  The yield curve (spread of yield on long-term bonds over short-term bonds) shows just slight compression. 

In other words, this is the picture of a market that appears to be preparing for just a slight slowdown.  If the Market expected much else, you should have expected to see a much greater effect on the yield curve.

Not to get too technical, but we want you to notice that we draw a distinction between the short-term interest rate that the market determines based off the Fed Funds rate and the actual Fed Funds rate, itself.  Why is this significant?  Even as the Fed Funds rate was unchanged week-over-week, you will notice that the market pushed the actual three-month short-term rate down...ever so slightly....but just enough to be different...and to to reinforce the fact that the market is expecting gentle economic compression in the short-term.