Initial Jobless claims dropped 10k to a Seasonally Adjusted 268k.  The four week moving average continued to rise to 278.5k.  The data is still being affected by the Verizon strike where New York workers have been able to file for unemployment benefits because Verizon has brought in replacement workers for striking workers.

The next month should be interesting for jobless claims.  Have we seen the bottom in claims for this cycle?  Or is the recent bump up more a function of temporary factors.  Stay tuned.

Kevin Spires, CFA, FRM

New Home Sale were just released and they were the strongest since January 2008 rising 16.6% to a seasonally adjusted annualized rate of 619k.  The past 3 months were revised up also making this a very strong upside surprise.  A quick disclosure:  Bellaire Capital Management, LLC has been overweight housing stocks in client accounts since 2010 through holdings in ITB & XHB.

Inventories of New Homes are currently at 247k which represents 4.7 months of inventories at current sales levels.  6 months of inventories is considered normal for New Home Sales.  Lower inventories predict continued increases in home construction.

Initial Jobless claims were released yesterday and there were 278k new jobless claims in the U.S. versus 294k the previous week.  The four week moving average is now 275.75k jobless claims.  Prior to the last 3 weeks, jobless claims were at their lowest levels since at least 1975.  There is some noise in the past 3 weeks data with a Verizon strike probably adding some 10-20 in claims.

Although jobless claims are still near their lowest in 40 years and have dropped by two thirds since the depths of the great recession, the four week moving average of jobless claims is now higher on a year over year basis for the first time since 2012.

The increase in claims on a year over year basis will deserve our full attention - if it extends for another couple of weeks past the impact of the Verizon strike.  Many employment indicators have weakened in 2016 and if initial claims start trending higher a greater sense of caution towards risk assets will become warranted.

Kevin Spires, CFA, FRM

On Tuesday, the Census Bureau released the New Home Construction report for April.  Housing Starts & Permits rebounded from March with Housing Starts up to a 1.172 million seasonally adjusted annual rate after March's revised 1.099 million seasonally adjusted annual rate.  April's number represents a minor drop from last April of 1.5%. 

Single Family Housing Starts are up over 5% year over year.  As the Housing Boom was mostly concentrated in Single Family Housing, those starts have been slower to recover than Multi Family Housing Starts.  A 5% annual gain shows the Single Family market is still continuing to recover at a healthy pace - a recovery that still has a long way to go.

Multi Family Housing Starts have come off a bit over the past few months.  Multi Family Starts have fully recovered from the housing bust coming in at levels greater than anytime in the past 30 years. Multi Family Housing (more than 4 units - basically apartment complexes) missed out on the Housing Boom so there hasn't been a need to work off a large excess inventory of apartments.

Last Friday's employment report was a bit disappointing with only 160k employees added in the U.S. versus an expectation of 200k.  I believe the next few months are going to be as disappointing or worse.  Almost every employment indicator I follow has degraded in the past few months - auguring the poorest job growth in the cycle is just ahead.

• Temporary Help jobs have contracted so far in 2016.  Some like to argue that strong growth in temporary jobs is a sign of poor labor market health.  The data suggests just the opposite - growth or contraction in temporary jobs leads growth or contraction in overall job growth by 2-3 months.  Employers tend to first expand hiring through temporary positions and then make those positions permanent if demand for the employer's good or service continues.  Temp employment has contracted in 2016 - down over 27k in the first 4 months of the year.
  

In summary, 3 indicators that I use to predict employment growth over the next 1-3 quarters have all turned negative in the past 3-4 months.  While none of the indicators are currently at recessionary levels, further slippage without a quick recovery would put the current expansion at risk.

Kevin Spires, CFA, FRM

Kevin Spires, CFA, FRM

Over in the ChartRoom, our Monthly US Housing Chart Package is now updated. 

One very important data point from the Housing Chart Package is the strong recovery in Home Builders Sentiment.  Released earlier this month, the NAHB/Wells Fargo Housing Market Indicator (HMI) has increased from 16 one year ago to 40 today.  The HMI leads single family housing starts by 3-5 months, so expect a rapid exceleration in Housing Starts over the next few months - after total housing starts have already been running at 20%+ Y/Y growth rates already.

One reason that Homebuilders have been feeling better is that Home Prices have stopped declining.  It is tough to build a spec house and have the price drop 5% over the time you are building the house - putting tremendous pressure on profit margins.

Now that 6 years have passed since the bubble burst, expect home construction to grow at double digit rates for the foreseeable future - turning that massive headwind into an economic tailwind.

 Kevin Spires, CFA, FRM

The Federal Reserve just released the results of its quarterly Senior Loan Office Survey(SLOS).  The results show continued easing of credit conditions across the vast majority of Real Estate, Commercial and Industrial Loans (C&I), and Consumer Loans.  Demand continues to be strong across most categories as well. 

The SLOS is a great predictor of C&I loans.  The SLOS conditions for medium and small business loans leads C&I loan growth by 4-6 quarters.  Loan conditions have been easy enough to support 10-15% loan growth since the summer of 2010.  Conditions will continue to support credit creation over the next 4-6 quarters.

There is no evidence of a credit crunch in the SLOS data.  One interesting tid bit is that the FOMC had the SLOS data in hand for their last Open Market Committee meeting last week. 

It is very difficult to argue for QE3 when credit conditions are this supportive of credit creation.  The recent acceleration in Money Supply and Bank Credit should continue based on the Senior Loan Officer Survey.  This data alone should have been enough to stop the Fed from embarking on further Quantitative Easing.  It may be a bit premature to call Mission Accomplished, but the way I read the data, the Fed should be moving towards a normalized policy stance, not trying to ease further.  Talk of a recession is fanciful and I think by year end, the chatter will move back towards the timing of the next Fed tightening and QE3 will have a stake put

Kevin Spires, CFA, FRM

The ISM Manufacturing Survey results were reported this morning and the composite was 49.8 for July versus 49.7 in June. 

New Orders also dipped below 50 for the first time during the recovery at 48.0.  This is a bit ominous as it implies a contraction in Industrial Production growth could take hold in the next quarter or two.  The European Crisis and the looming fiscal cliff in the U.S. are causing weakness to seep into the Manufacturing Surveys.

I am a bit doubtful that this weakness will translate into a broader slump (based on employment, housing, and liquidity indicators), but the sharp contraction in new orders, if extended, would be a strong piece of evidence that a deeper slump was imminent.

Kevin Spires, CFA, FRM

Initial jobless claims were 353k for the week ending July 20th down from an upwardly revised 388k last week.  The four week moving average dropped to 367k, very near to a cycle low.

Initial claims have been marred by seasonal adjustment issues for the past 4-5 months.  There was been a second quarter bump in claims that many believe was due to seasonal adjustment issues and now the current claims are tainted by the lack of normal layoffs in the auto industry.

I have been looking at the 13 week moving average versus the 13 week moving average 52 weeks ago.  Claims on this basis are down over 11% versus last year - and have been down over 10% on this basis for over a month.  In general, this is not a "slowly" improving job market, but a steadily improving job market that has the potential to produce some very strong employment growth if the trend continues.

Kevin Spires, CFA, FRM

The ISM Manufacturing report was released at 10:00 am EST today.  It was much worse than expected, with the Composite falling to 49.7 from 53.5 last month (50 is expansion/contraction threshhold).  New Orders plunged over 12 points from 60.1 to 47.8.  Employment was the lone bright spot, dropping slightly from 56.9 to 56.6.

With the plunge in the New Orders sub-component, Industrial Production growth is likely to stall in the coming quarter.  Looking at the trend in New Orders, there have been lower highs and lower lows each year going back to the start of the recovery in 2009.

This is another data point that will cause markets to build in expectations of QE3.  I believe that Bernanke wants to print more money, but he is hesitant to do so without a longer string of weaker data.