DISAPPOINTING, DEFLATIONARY, DOUBLE DIP?

By Annaly Capital Management:

There was a heavy economic data schedule in the back half of this week.

On Thursday we got Industrial Production (IP) and Capacity Utilization (Cap-U) for June, along with Philly Fed Business Conditions and Empire State manufacturing surveys for July. The Empire State survey dropped to around 5 from near 20 in June, and Philly Fed dropped to 5.1 from 8, both of these well below expectations. Although IP and Cap-U have been steadily improving during the prior year, both stalled in June. Given the correlation between IP and the Philly Fed survey, shown below with Industrial Production lagged 6 months, we expect headwinds for the manufacturing-led recovery in coming months.

It’s hard to imagine another plunge in Industrial Production like the one in 2008. Production is already back to levels first seen in 2000, a full decade with no advance in production, and inventories have already gone through the correction process (as evidenced by the sales/inventory ratio). But it seems obvious that recent growth rates are unsustainable, particularly in the absence of a real pickup in final sales.

This morning, consumer price data was released. The Consumer Price Index is rolling over, falling for 3 months in a row, and is now at roughly the same level as it was two years ago. The year-over-year growth rate looks to be heading back towards zero.

Maybe the 10yr at 3% isn’t so rich after all.

Friday morning also brought fresh weekly ECRI leading index data. The debate about a “double-dip” recession has been deafening, but according to this index, we seem to already be in back-to-back recessions that are worse than the 1980/1982 experience.

(ECRI Weekly Leading Indicator)

The ECRI data series only includes just over 40 years of data, the blink of an economic eye, but the recent behavior of this leading index is disconcerting.

We’re still early in earnings season, but several big banks reported earnings before the market open on Friday. Citigroup posted earnings of $2.7 billion (which contained $1.5 billion of loan loss reserve release, and around a $1 billion of positive asset markups) and Bank of America came in at $3.1 billion (including about a $1.1 billion pretax gain from asset sales, a $1.2 billion pretax gain related to Merrill Lynch structured notes, and enjoyed a benefit from having loss provisions trail charge-offs by about $1.5 billion). Despite beating expectations, these results failed to inspire investors, perhaps because of the earnings due to one-time, non-operating gains and reserve releases. When referring to his own company’s gains from reserve releases, JPM’s Jamie Dimon said “It’s just ink on paper. It means nothing.” These reserve releases are dependent on improving credit, which is dependent on a continued economic recovery. Bank of America CEO Brian Moynihan said “Our experts don’t believe there will be a double dip.”

The risk that these experts are wrong seems to be rising.

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