Friday, August 15, 2008

NY Manufacturing Expands, Long-term TIC Flows Decelerate, Industrial Production Rises Again, Confidence Improves Slightly

- Empire Manufacturing for August rose to 2.8 versus estimates of -4.0 and a reading of -4.9 in July.

- Net Long-term TIC Flows for June came in at $53.4 billion versus estimates of $60.0 billion and an upwardly revised $83.2 billion in May.

- Industrial Production for July rose .2% versus estimates of unch. and a .4% gain in June.

- Capacity Utilization for July rose to 79.9% versus estimates of 79.8% and 79.8% in June.

- Preliminary Univ. of Mich. Consumer Confidence for August rose to 61.7 versus estimates of 62.0 and a reading of 61.2 in July.

BOTTOM LINE: Manufacturing in NY unexpectedly grew in August as the cost of raw materials cooled, making companies more optimistic about the future, Bloomberg reported. The Prices Paid component fell to 65.2 from 77.9 in July, the largest decline in more than two years. The CRB Index, the main source of inflation fears, has plunged 19.6% in less than six weeks. The Outlook for the next six months component soared to 34.6, the highest level this year, from 15.6 in July. The New Orders component fell to -2.2 from 8.3 in July. The Employment component improved to -4.5 from -6.3. I expect manufacturing to continue to improve modestly over the next few months on inventory rebuilding and higher-than-expected demand as a result of plunging commodity prices.

International buying of US financial assets slowed in June as investors sold stocks and demand weakened for corporate bonds, Bloomberg reported. This report also showed that foreign demand for US agency debt from companies such as Fannie Mae and Freddie Mac strengthened from a month earlier on more buying by private investors. Buying of long-term agency debt rose a net $31.4 billion, the most since February. Net purchases of US Treasury notes and bonds rose $28.3 billion versus $5.7 billion the prior month. I expect foreign demand for US assets to rise back to robust levels over the coming months on US stock outperformance and a rising US dollar.

Industrial Production in the US unexpectedly rose in July, helped by gains in automobiles, metals and machinery, Bloomberg said. Demand for autos rose for a third month, reflecting a rebound from the American Axle strike. I continue to believe that strike had a far greater impact on overall US economic activity in the earlier part of the year than is generally perceived. Capacity Utilization at 79.8% is still below the long-term average of 81%, which is another positive on the inflation front. Excluding autos, factory output rose .2% after a .2% decline in June. I expect industrial production to continue to show modest improvement over the intermediate-term.

Confidence among US consumers showed the first back-to-back gain in almost two years in August as lower energy prices and a rebound in stock prices boosted sentiment, Bloomberg reported. The Expectations component of the index rose to 56.8 from 53.5, despite an end to the tax rebate stimulus checks. The Present Situation component fell to 69.3 from 73.1 the prior month. I expect Consumer Confidence to improve significantly during 4Q as stocks rise further, election uncertainty ends, energy/food prices fall more, the US dollar rallies further, employment improves modestly, interest rates remain low and inflation decelerates meaningfully. The Citi eurozone economic surprise index is now -166.1, while the US index is up to +46.5. The US Dollar Index is rising another .54% and the 10-year yield is falling another 5 basis points on today’s news.

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