Earnings less than impressive, but sun shines on stocks

Let's talk earnings first.

Major bank earnings stung by capital market pressure.  The major banks posted less-than impressive earnings – blame uncertainty in the capital markets and weaker trading revenues.
But there have been positive takeaways:

• Lending growth has started to accelerate, mimicking loan data provided by the Fed
• Credit quality is slowly improving
• Capital ratios remain solid

Earnings, Earnings, Earnings: It’s still early but just 47% of the companies of the less than 10% of the S&P 500 that has reported through Jan 18th have topped estimates, down from 70% in the previous four quarters (Wall Street Journal). And it’s been a much-reduced bar that companies have had to clear.

The earnings season is young. Let's see if we get a shot in the arm from the non-financials.
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Despite the slow start to earnings season, it's RISK ON in the market! Last year's losers, materials and financials are this year's winners, as funds rotate out of last year's winners, utilities and consumer staples.

But let's be clear, despite the massive amounts of liquidity offered by the ECB, troubles in Europe haven't gone away, and we aren't seeing the needed fiscal reforms that would put the continent on a path toward fiscal solvency. But for now the focus has returned to our shores, as the economic data have been generally upbeat.
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Turning to the data,

1-Weekly jobless claims tumble 50k to 352k. That's impressive and strongly suggests the expanding economy is forcing companies to hold onto employees.

But let's wait one more week on this volatile indicator. Yes, it's timely and suggests 2012 is off to a fast start, but quirks in January's data can sometimes dull the value of the report at this time of year.

2-Housing starts - Housing stocks caught fire late last year and yesterday's rise in home builder sentiment to less pessimistic levels (4 1/2-year high) attracted new buyers. And Dec's drop in housing starts is a bit misleading due to a huge drop in multi-family starts.

Both single-family starts and permits advanced. No wonder builder sentiment is improving.


Stay tuned.

Weekly jobless claims back below 400,000

Weekly jobless claims fell 37,000 in the latest week to 391,000, the first time since early April that jobless claims dipped back below the psychologically important 400,000 level.

The unexpected decline also had a favorable impact on the 4-week moving average, which slipped 5,250 to 417,000.

Although this is one of my favorite leading indicators because of its timeliness and its read on business confidence – note, its rise above 400,000 in the spring provided an early warning signal on the impending slowdown, I’m skeptical about today’s welcome drop since there has been little else to suggest that a much-needed pick up in economic activity is at hand.

Further, Bloomberg News reported that difficulties in making seasonal adjustments may have played a role.

I’d like to wait for another round or two of data.

Weekly jobless claims back below 400k but special factors muddy data

Good news…sort of.  Weekly jobless claims are back below 400,000 for the first time since early April. But seasonal adjustments may not be capturing certain factors that led to the welcome decline.

Weekly initial jobless claims dropped 24,000 in the latest week to 398,000.

The 4-week moving average, which smooths away some of the volatility in the weekly number, dropped 8,500 to 413,750. Continuing claims were down 17,000 to 3.7 million.

Anytime we see jobless claims come in well above or below the consensus forecast – in this case, 425,000 per Bloomberg – its important to footnote the drop by noting that this number can be volatile on a week by week basis.

Moreover, retooling in the auto sector at this time of year further muddies the data, even with seasonal adjustments.

At a time when gauges of economic activity are detecting economic weakness, the dip is welcome, but let’s keep a close eye over the next couple of weeks so we can confirm whether or not a very modest pick up in economic activity is at hand.

Drop in jobless claims may be related to special factors

A drop in weekly jobless claims to the lowest reading in nearly three months would normally be welcome news, not just for job seekers and those worried about layoffs, but Fed Chairman Ben Bernanke, who surprised the markets yesterday with talk that another round of easing is being considered.

But special factors may have played a role.

Weekly initial jobless claims fell 22,000 in the latest week to 405,000, matching the Bloomberg forecast. The 4-week moving average dipped 3,750 to 423,250, while continuing claims edged up 15,000 to 3.73 million.



What might normally be greeted favorably must be looked at somewhat skeptically.

Seasonality is taken into account each week by the Department of Labor but adjustments sometimes get a bit tricky following a major holiday weekend.

Additionally, the timing of auto shutdowns for re-tooling, which takes place each year at about this time, can also skew the data, Bloomberg News pointed out.

Or course, the decent-sized drop is welcome, but let’s wait a couple of weeks and see how this plays out before stating that the downward trend we saw earlier in the year has reasserted itself.

Weekly jobless claims edge lower

Weekly initial jobless claims fell 14,000 in the latest week to 418,000, while the 4-week moving average dropped by 3,000 to 424,750. Continuing claims were down 43,000 to 3.68 million.



There has been little change in the rate of jobless claims, which have been holding at an elevated level above 400,000 since April.

In one sense, the recent plateau has been mildly encouraging since this leading indicator of economic activity is not signaling the recovery is about to stall.

However, it’s not suggesting a more vibrant economy is on the horizon either.

Jobless claims hold in narrow path

Weekly jobless claims fell 1,000 in the latest week to 428,000 and have now held in a very narrow range – 420,000 to 430,000 for six consecutive weeks. As a result, the 4-week moving average barely moved, rising by just 500 to 426,750.



The lack of any significant upward are downward movement in jobless claims, following a brief dip earlier in the year below 400,000, is telling us that the economy continues to slowly improve.

Based on the release as well as recent trends, no new recession is on the horizon but any pick up in economic growth is unlikely, either.

Simply put jobless claims are still elevated, underscoring the uncertainty many of us feel regarding what’s happening in the economy.

Despite the lack of any signs of an acceleration in economic activity, the Chicago Purchasing Managers Index, which looks at manufacturing activity in the Midwest, unexpectedly rose in the latest month.



A possible pick up in auto production tied to an easing of the supply chain disruption from Japan that followed the tragic earthquake that hit the nation earlier in the year might explain the welcome rise in the index.

Both production and new orders surged, while inventories tumbled.  Unfortunately, prices paid eased slightly but remained at a worrisome level, which is somewhat surprising given the recent fall in commodity prices.

Nonetheless, the Chicago PMI tends to be a rather volatile index, and other measures of regional manufacturing have slowed significantly.

We’ll get a better read when the ISM Manufacturing Index is released on Friday.

Weekly jobless claims camp out on a plateau

Bloomberg News cited “technical issues” that forced the Labor Department to estimate claims in six states as a possible reason  for a troublesome 9,000 increase in weekly initial jobless claims to 429,000 in the latest week.



The 4-week moving average held steady at 426,250, and continuing claims were practically unchanged at 3.7 million.

Nonetheless, weekly jobless claims are holding well above 400,000 following a brief dip below the key psychological level.  And the elevated level highlights the uncertainty in the economy and the reduced pace of the recovery.

Weekly jobless claims at four-week low

In what has to be a disappointing report for those who have been very bearish on the economy, first time filers for unemployment claims unexpectedly fell to a four week low.

Weekly jobless claims declined by 16,000 to 414,000, and the 4-week moving average was unchanged at 424,750. Continuing claims dipped 21,000 to 3.68 million.

Weekly jobless claims snuck above 400,000 in early April, was one of the first warning signs the economy was headed for a bump in the road, and has held above the key psychological level ever since.

Yes, we’re still above 400,000, highlighting the fragile and slow recovery from the worst recession in over 70 years.

But the larger-than-expected drop and recent stability in this key measure of activity is among the clearest indicators that the economy is not headed back into another slump.

A sigh of relief following weekly jobless claims

Yesterday’s one-two punch from an anemic job’s report and a sharper-than-forecast slowdown in manufacturing sent stocks tumbling and investors fleeing into the safety of Treasuries, but today’s release of weekly jobless claims is soothing fears in some corners that the economic slowdown isn’t turning into something worse.

Weekly initial jobless claims fell 6,000 in the latest week to 422,000, and the 4-week moving average declined 14,000 to 425,500. Continuing claims were nearly unchanged at 3.71 million.



Attention now shifts to tomorrow’s all-important labor report from the government. But before we talk about non-farm payrolls and the release of the unemployment rate, it’s important to spend a moment on the weekly claims number.

Jobless claims jumped above 400,000 in early April and offered up the first evidence that the recovery was beginning to slow.

Subsequent data have showed we’re in another economic soft patch, but yesterday’s talk from some analysts that we’re headed into a new recession is premature in my view.

As I’ve repeated in the past, weekly jobless claims are an excellent barometer of economic health, and claims, though elevated, seem to have plateaued in recent weeks.

Keep an eye on this report for an early warning sign of further economic weakening, but at this point, slow growth is probably the most likely path.

Upcoming labor report
Tomorrow’s report from the government is expected to show 190,000 new jobs, including 210,000 generated from the private-sector, according to Bloomberg.  The unemployment rate is forecast to fall from 9.0% to 8.9%.

Note: latest survey by Bloomberg reflects reduced expectations as analysts incorporate slower growth and weak ADP number in forecasts. Nonfarm payrolls up by 170,000 (even worse, a MarketWatch survey sees 125,000) and private sector up by 180,000.

Anything near 180,000 would alleviate some of the concern swirling around the recovery, but we’re likely to get a one-time boost from McDonald’s, which reportedly added between 50,000 – 60,000 new jobs in late April and early May.

That would put private-sector job creation at about 130,000. Not very impressive but not as jarring as yesterday’s figure from ADP.

Rising weekly jobless claims signal slowdown is continuing

Weekly jobless claims are a great barometer of economic activity because of its timeliness – data are less than one week old – and the release provides us a very accurate view of business confidence and business activity.

The weekly figure and the recent trend are analogous to taking the cholesterol, blood pressure, respiration and the pulse of the economy.

Why? Because falling layoffs are an indication that business activity is picking up, as employers are reluctant to lay off workers they will need to smoothly process an uptick in sales.

Conversely, rising layoffs are a solid indication that new customers aren’t coming through the door, and current customers, if not cutting back, are reluctant to ramp up new orders.



That’s why the recent rise in jobless claims has been discouraging.  And Fed members must be a bit jittery at this point as they get set to end QE2 purchases in about four weeks.

Weekly initial jobless claims rose to 424,000, up from an upwardly revised 414,000 in the prior week. The 4-week moving average slipped by 1,750 to 438,500, while continuing claims fell 46,000 to 3.69 million.

The latest numbers aren’t signaling that growth is coming to a standstill, but the already modest economic recovery has lost momentum despite heavy stimulus from the Fed and the government.

Interest rates remain at rock bottom levels, the Fed has poured trillions of dollars into the economy, the government ramped up spending, payroll taxes have been cut, yet millions remain unemployed.

Credit standards at banks, however, are still tight, and consumers, who are already laden with debt, just aren’t comfortable loading up on even more credit.

Given the state of the housing market, falling home prices, job insecurities and a banking system that’s still on the mend (and let’s not forget the spike in gasoline prices),  it’s not a surprise that this recovery has not responded to the shock therapy that would typically spark a healthy recovery.

And it may be a while before the excesses of the past decade or two are finally wrung out of the system.

Philly Fed points to slowdown in manufacturing

Following a weaker reading in the Empire Index out on Monday, the Philly Fed’s Business Activity Index slowed from 18.5 in April to 3.9 in May, its lowest reading since October.  A reading of zero indicates that manufacturing in the mid-Atlantic region is neither accelerating nor contracting.


















Source: Federal Reserve Bank of Philadelphia

Most of the subcomponents in the index declined, suggesting a broad-based slowdown is continuing into May.

New orders,  a proxy for future activity, fell from 18.8 to 5.4 and shipments slid from 29.1 to 6.5. Price pressures remain but receded amid the recent dip in commodity prices.

In the meantime, manufacturers are less optimistic going forward, according to the six-month outlook, with the index falling from 33.6 to 16.6.

Industrial production last month was unchanged, as the kink in the supply chain caused by the earthquake in Japan hit auto manufacturers last month.

Given the early look at May’s data, it appears that softness is the sector is continuing.

Jobless claims fall but remain elevated
Despite the recent spate of unsettling economic news, the second weekly decline in unemployment claims indicates that economic activity is not grinding to a halt.



Weekly initial jobless claims fell 29,000 in the latest week to 409,000, while the 4-week moving average edged up 1,250 to 439.000. Continuing claims slid 81,000 the 3.71 million.

Special factors that were not accounted for in the seasonal adjustments were responsible for the surge to 478,000 claims a couple of weeks ago.

Although the recent decline to the lowest reading in four weeks is reassuring, the elevated level – claims have been above 400,000 for six weeks – suggests the recent progress in the labor market may slow.

And the upward drift also implies the economy has hit a bump in the road.

Weekly jobless claims at three-month high

Weekly jobless claims unexpectedly jumped from 404,000 in the prior week to 429,000, the third consecutive week above 400,000 and the highest level in three months.

The 4-week moving average increased by 9,250 to 408,500, and continuing claims fell 68,000 to 3.64 million.

GDP in Q1 expanded by 1.8% according to preliminary data, and given the unexpected rise in jobless claims over the past three weeks, it appears that the slowdown in economic activity is continuing into Q2.

Oil has risen by about $20-25 per barrel in recent months to just over $110 per barrel but remains well below the all-time high of $145.  Gasoline prices, however, have surged by about a $1 per gallon in the last year and are hovering near the high hit in 2008.

Whether the slowdown is directly related to the spike in gasoline prices or the glitches in the supply chain caused by the earthquake in Japan, the unexpectedly large rise in jobless claims over the past three weeks is disconcerting.

It not only points a further slowing in the recovery, but it may also be signaling fewer gains on the employment front.

Weekly jobless claims hold above 400,000

Weekly jobless claims held above the psychologically important level of 400,000 for the second-consecutive week, according to data provided this morning by the Department of Labor.

Weekly initial jobless claims fell from an upwardly revised 416,000 in the prior week to 403,000. The 4-week moving average edged up 2,250 to 399,000, and continuing claims slipped by 7,000 to 3.70 million.



After settling below 400,000 in much of February and March, the progress in claims appears to be stalling out.  A kink in the supply chain caused by the earthquake in Japan may be responsible for much of the recent uptick, and if that's the case, growth may moderate some in the coming months.

Economic growth could also be plateauing amid lackluster consumer confidence and a general uncertainty that still prevails following the steep recession and generally slow pace of job creation.

An unexpectedly sharp drop in the sometimes volatile Philly Fed Business Activity Index (see chart below) released today may also be foreshadowing a modest deceleration in activity, and I suspect some of the supply-chain issues connected with Japan could temporarily cool the red-hot manufacturing sector.



But I’m cautiously optimistic that the economic recovery is intact, especially given the recent uptick in job creation and confidence investors have been displaying in stocks.

Despite a surge in gasoline prices, uncertainty in the Middle East and the earthquake in Japan, shares have blown past economic headwinds and are flirting with multiyear highs, suggesting that investors are confident that revenues and profits will continue to improve at the nation’s largest companies in the coming months.

Weekly jobless claims back above 400,000

Weekly initial jobless claims increased 27,000 in the latest week to 412,000, well above most economists’ estimates.

The 4-week moving average rose 5,500 to 395,750, and continuing claims dipped by 58,000 to 3.68 million.



Because of its timeliness and its reflection of business confidence, jobless claims are an excellent leading indicator of future economic activity.

The decline below 400,000 has been encouraging as economic activity has picked up in recent months, and the sudden reversal would be a bit concerning.

Bloomberg News did report this morning that factors tied to the start of the quarter may be responsible for the unexpected jump in claims. It did not make mention of the earthquake in Japan, which has caused a kink in the global supply chain.

Due to the volatility of the weekly numbers, we’ll need confirmation over the next couple of weeks as to whether we’re seeing a slowdown in the recovery or just a temporary blip in weekly claims tied to the difficulty in making seasonal adjustments.

Weekly jobless claims drift lower

Weekly jobless claims fell by 10,000 in the latest week to 382,000, which marks the sixth week in seven that jobless claims have come in under the psychologically important level of 400,000.

The 4-week moving average fell 5,750 to 389,500 and continuing claims were down 9,000 to 3.7 million.



Despite the spike in gasoline prices, the downward drift in jobless claims does suggest that the economic recovery and the modest progress we've been seeing in the labor market are continuing.

Otherwise, there’s not a whole lot to say about this week’s data.

Weekly jobless claims settling below 400,000

Weekly initial jobless claims posted a small 5,000 dip in the latest week to 382,000, while the 4-week moving average slipped by 1,500 to 385,250.



That’s the fourth week in five weekly claims have held below 400,000, signaling that the burst in economic activity that began late last year and early this year is continuing into March.

The gradual improvement in jobless claims also suggests that the labor market continues to slowly heal.

Historically speaking, claims are still a bit on the high side, reflecting how far the economy sank during the recession and the modest uncertainty that still exists as the recovery officially enters its 21st month.

But the downward trend is intact, as employers sense the pick up in the economy and the need to retain workers.

Volatility in stocks and a look at jobless claims, CPI

Last week’s market volatility provided plenty of action for investors, and in most cases, the roller-coaster ride was a bit much for most of us.

Worries about the nuclear disaster in Japan and the surrounding uncertainty sent stocks sharply lower at the beginning of the week, but shares managed to limit losses by Friday.

With the economic data taking a backseat to global events, I wanted to take a moment and look at a couple of important releases during the week.

First, weekly jobless claims tumbled 16,000 to 385,000. With seasonal factors out of the way, the reassuring decline indicates that the labor market continues to slowly heal as the pick up in economic activity hinders layoffs. So far, the jump in gasoline prices is not doing much to slow the recovery.



Second, a quick overview of retail inflation.

Not surprisingly, the Consumer Price Index jumped 0.5% in February amid a 3.4% rise in energy costs and a 0.6% rise in food.   Energy has jumped by more than 1% in six of the last seven months, and the latest surge in gasoline prices last month continues to push energy higher.

Food is a different matter.  Agricultural costs began their upward climb last year, but the CPI didn’t detect rising retail prices until January.  Given the steep rise in energy and the increase in food prices, the jump in the year-over-year headline rate is to be expected.



However, the Fed tends to throw out food and energy costs when it looks at price stability, and core inflation, though ticking higher, remains well-behaved on a year-over-year basis.

Nonetheless, a note of caution is warranted.  The core rate has risen 0.2% in both January and February.  Not a big deal except prior to January, we had to go back to October 2009 before we saw prices rise at that rate.

That’s still modest but the CPI is beginning to detect a slow acceleration in inflation, as the recovery picks up steam and steep increases in raw material prices are slowly passed on to consumers.

As I mentioned last month, the best news on inflation is behind us. But I’d be careful about betting on any tightening in Fed policy at this juncture, especially given the uncertainty that has crept into the economic outlook in recent weeks.

Nonfarm payrolls lag but other measures of employment suggest labor market is healing

The recovery is finally kicking into high gear, as evidenced by much of the economic data out recently – see the latest ISM surveys and falling jobless claims, which I’ll discuss shortly. But the government’s monthly release of nonfarm payrolls has been agonizingly slow to detect that the labor market is benefiting from the improvement in economic activity.

So with the government’s labor report out tomorrow, I wanted to take some time to review what other measures of the job market have been detecting, and much of it has been positive.

As the first chart below reveals, we did see a spike in hiring earlier last year, but that was tied to the temporary jobs generated by the 2010 census, which was then followed by four months job losses as those positions came to an end.



Further, the last three months have been disappointing, despite the drop in the unemployment rate, which is derived from the household survey of families, as opposed to nonfarm payrolls, which comes from the establishment survey of companies.

Private-sector growth, however, has been more consistent but not enough to instill confidence in most job seekers.

Fewer are joining the ranks of the unemployed

Weekly jobless claims is released each week and is one of my favorite economic indicators because of its timeliness and how accurately it measures business confidence.

Falling claims tells us that fewer individuals are entering the ranks of the unemployed, but it does not necessarily suggest that firms are ratcheting up on hiring.



What it does say is that business confidence is improving, as companies choose to hang onto their employees amid an improvement in the business climate.  And an improving business climate is a key part of the hiring equation.

ADP is detecting movement

Moving along, the ADP survey of the private sector, unlike the nonfarm payroll survey, has been detecting job growth.

As evidenced by the chart below, job growth has improved in the private sector in four of the last five months in response to faster economic activity.



Nonetheless, most analysts, economists, investors and politicians want to see a confirmation from government data that a renewed vigor in hiring is at hand.

Meanwhile, the Fed Chief Ben Bernanke said in his semiannual Monetary Policy Report to the Congress on Wednesday that “we do see some grounds for optimism about the job market over the next few quarters,” including as “improvement in firms' hiring plans.”

The ISM is seeing growth

A look at the sub-components of the ISM manufacturing and service surveys does reveal that companies are in the process of ramping up hiring.

In fact, hiring among manufacturers is now at the highest levels since the early 1970s (see last chart) , while service industries, which make up most of the activity in the U.S. economy, have also been showing signs of life in recent months (see chart below). A reading above 50 suggests companies are adding employees.



In a sign that the production side of the U.S. economy is firing on all cylinders, the final chart below, which looks at data going back to 1965, provides indisputable evidence, in my view, that U.S. manufacturers are experiencing hefty increases in demand and are responding with plenty of '”help wanted signs.”



Still, the economy is dominated by the service side so it is encouraging to see the ISM services survey detect a renewed interest in bringing folks aboard.

Looking ahead, tomorrow’s release of nonfarm payrolls is expected to show that the economy generated about 180,000 new jobs. Anything just short of 200,000 would be encouraging, however, it's important to point out that forecasters have been too optimistic in recent months. To be fair, the monthly number is very difficult to pinpoint.

Still, based on the evidence that economic activity is accelerating, the recovery is broadening and surveys of the labor market are pointing in the right direction, it’s only a matter of time before the nonfarm payroll survey reflects what’s going on in the economy in my view.

Weekly jobless claims back below 400,000

Weekly initial jobless claims fell 21,000 in the latest week to 391,000, and the 4-week moving average, which removes much of the volatility from the seven-day number, dipped 16,500 to 402,000.

With weather receding as a factor that has caused all kinds of distortions with the data, the downward trend is providing a reassuring vote of confidence that the pace of the recovery is quickening.

Weather continues to skew weekly jobless claims data

Weekly jobless claims jumped 25,000 in the latest week, which follows a 34,000 drop in the prior week, as the major winter storms that have rocked parts of the county continue to play havoc with the report.

The 4-week moving average edged up by 1,750 to 417,750, and continuing claims rose just 1,000 to 3.91 million.



The extreme volatility we are seeing in the weekly data and what I harped on last week (despite comments to the contrary by the Labor Department)is very likely related to the rough winter weather we’ve experienced in parts of the country.

Last week’s big drop likely occurred as some first-time filers were unable to file, pushing them into the latest week and skewing the data upward.

Now that we are seeing the rough winter storms subside, we may now have to take into account President’s Day this Monday. Though the government does adjust for seasonality brought on by holiday weekends, it is sometimes difficult to capture the nuances of individual government holidays, which can make the data somewhat suspect.

Hence, we might be forced to wait until the end of the month or early March, assuming no major weather events, before we get an accurate read on jobless claims.

I am confident, however, that once things shake out, claims should settle below 400,000, adding to the evidence that the recovery is broadening and the labor market is very slowly on the mend.