“Men willingly believe what they wish.”
- Julius Caesar
I think I have become way too cynical, but it’s getting harder for me to believe what I hear and read about the outlook for 2H10. I normally give people the benefit of the doubt, but signs of the early stages of a renewed economic downturn are everywhere. Yet, given what we read during the current earnings season, corporate America is not tuned in to the same channel or at least they don’t want to fess up to it.
This is what I’m seeing - a weakening labor market, softening consumer confidence, softening housing activity and retail sales, and an intensifying trade deficit - the early stages of a renewed economic decline.
I’m not alone because in my back pocket I have the FX market, the bond market and the US consumer all seeing what I see. For the time being, equity investors willingly believe what they want to.
Currencies are a leading indicator for a country’s health and the US dollar is getting crushed. The DXY is down 4.8% over the past month and looks to be down 4 of the last five days (trading down 72 bps today at the time of writing).
While the dollar is getting crushed the EURO has rallied 7.0% (trading up 67 bps at the time of writing). Knowing that a country’s currency is a leading indicator for a country’s health, what are the MACRO headlines in Europe today - European confidence in the economic outlook rose to the highest in more than two years in July and German unemployment declined for a 13th straight month as an export-led recovery gathers strength.
Tomorrow, what will the headlines look like for the USA?
We’ll get the BEA’s overstated estimate of Q2 US GDP. Bloomberg is showing a consensus estimate of 2.5% for the second-quarter, down from the 2.7% as reported for the first-quarter (and downward revisions are likely). In 2Q10, a slower growth rate would be consistent with recent underlying MACRO data points. I believe that risks are fairly high that the reported growth will surprise the consensus on the downside.
The following week we will get the July labor numbers and there is a good chance that they will be softer than an already soft consensus. Bloomberg is posting expectations of a 100,000 decline in monthly payrolls. I believe that number includes layoffs of temporary and census workers in July, which will be roughly 144,000 (per Census reporting). This implies little or no growth in nonfarm payrolls, ex-census workers. In June, payrolls declined by 125,000, gaining 100,000 ex-census. Bloomberg also has the unemployment rate estimate at 9.6%, up from June’s 9.5%.
Yesterday, the FED provided a very consistent message about the current consumer trends:
New York - Contacts generally indicate that sales of fashion items and apparel were particularly strong, whereas sales of big-ticket appliances were relatively sluggish.
Philadelphia - Most retailers said warm weather boosted sales of summer apparel, but sales of big-ticket appliances, remained weak. “The consumer is still cautious and looking for value.”
Cleveland - Purchases of apparel and food products are doing well, while spending on discretionary items has weakened.
Richmond - A contact at a large home and garden chain reported that impulse buying fell, and that home remodeling purchases had scaled back dramatically as consumers “splurged small.” Overall, according to our District survey, big-ticket purchases and shopper traffic plummeted.
Atlanta - Although most merchants have reported improved conditions since the beginning of the year, the outlook among retailers was more subdued than in previous months.
Chicago - While spending on food and other necessities rose, spending on home-related and luxury items decreased.
St. Louis - Contacts in education services, air transportation support services, and the casino industry announced plans to decrease operations and lay off workers.
Minneapolis - In South Dakota, a mall manager noted that recent sales were mixed; consumers remained cautious as traffic continued to be driven by promotions.
Kansas City - Retailers expected sales to rise over the next three months and a continued downward trend in prices… Restaurant sales were flat compared to the previous survey, but the average check amount fell.
Dallas - Department store sales were slightly stronger than anticipated, but the pace is expected to moderate in the second half. Consumers continue to deleverage and correspondingly remain price sensitive.
San Francisco - While consumers remained focused on necessities and lower-priced options, reports indicated expanding consumer appetite for discretionary spending.
The most bullish commentary came from the San Francisco region. I’m not sure what to do with that, knowing that California is in a financial mess, though comparisons are likely easier in that region.
In the last month, the corporate earnings season (and corporate storytelling) has driven the S&P 500 and the Consumer Discretionary index higher, up 2.9% and 2.6%, respectively. This market rally has occurred against the backdrop of sluggish macro headlines, but over the last three months, Consumer Discretionary was the second worst performing sector (-9.8%) next to Energy (-11.1%). As Keith always says, markets don’t lie, people do.
Function in disaster; finish in style
Howard Penney
