Retail sales and JOLTS

**originally published on 2.15.16 on

A three day weekend is just what the market needed after one of the most volatile weeks that I can remember. It’d be nice to think that stocks rallied on Friday in observance of Presidents Day on Monday, but I’m afraid there are only economic forces at work here. Friday saw the S&P 500 close at its highs for the day with a near 2% gain on decent volume. Considering all of the carnage that occurred Thursday on high volume, it’s safe to say the sellers were exhausted. At least they are for the time being it seems. Up until Friday, the “U.S. is in recession” narrative was building steam in financial media. Even with weekly unemployment claims resuming their downward trend to historically low levels and the Atlanta Fed GDPNow forecast for Q1 GDP going to 2.5% from 2.2% on Tuesday, the recession narrative kept on trucking. Then came Friday morning and much to the chagrin of the recessionistas, the January advance retail sales data came in much better than expected. Core sales came in up .6% for the month versus .3% expectations. To put that in perspective, for all of 2015, core sales averaged just .2% monthly gains. This is not the kind of data that recessions are made of. At the end of the day, its consumption that drives the U.S. economy and people are consuming. One of my favorite line items in the retail report is Nonstore retailers, or online shopping as we all know it. Nonstore retail was up 1.6% for the month and 8.7% year over year. As you can see below, it’s tough to get a better looking chart.

nonstore 2.13.16

But people will no doubt continue on with the recession talk. As they say, that’s what makes markets.

On Tuesday, we got one of Yellen’s favorite labor indicators, the Job Openings and Labor Turnover Survey (JOLTS). As I discussed in last week’s Real Money article, I was expecting to see a pick up in the quits rate to go along with the rise in average hourly earnings we got in the December and January nonfarm payroll reports (remember JOLTS is a month behind). Sure enough, the JOLTS report showed a sharp increase in quits for December along with a near record amount of job openings. When we look at the relationship between job openings and quit rates, it’s hard to be anything but optimistic about future earnings gains as employers will compete to keep employees. This is what happens in a tight labor market.

jolts 2.13.16

Then looking at the historical relationship between job openings and continuing claims data, we could very well see a further drop in the claims level. This is what makes keeping an eye on weekly claims data so important. Claims data is based on actual people entering and leaving the workforce, not like the sampling done with surveys. Claims data is a real time gauge of the labor market.

claims 2.14.16

Right now we have some very smart people in financial media pointing to the flat shape of the treasury yield curve and saying that the curve predicting a recession. My problem with this theory is that it assigns an omniscient ability to an indicator that is ultimately driven by people. Unless the people trading these markets do indeed have deity like abilities, I’m afraid it’s no more predictive than a magic eight ball. While in the years prior to QE, the yield curve did provide good insight into current inflation and rate expectations, it has since been stripped of that insight. The advent of massive worldwide central bank interventions, especially ZIRP and NIRP, has made the curve hollow shell of its former self. Taking this a step further, I don’t believe that any financial or commodity market is “smarter” than any other market. Asset prices take their cue from supply and demand which is ultimately driven by future economic expectations. This is why I believe a correct assessment of the macro economic situation is the key to being on the right side of a trade. That said, looking at the charts I have provided, the only market investors should trust for predictive powers, is the job market. Yes, I believe employment is a leading and not a lagging indicator.

Coming up this week we have some A-list economic data points including housing starts, industrial production, Philadelphia Fed Manufacturing, PPI and CPI. Given the uptick in both ISM and Markit manufacturing data, we could see a bounce back in industrial production and the Philly Fed. Again, I don’t expect much from the manufacturing side of things other than perhaps some slight reversion to a lowered mean. The good news is, so far the week seems to be off to a good start with Asia trading up. The bad news is, its only Tuesday.


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