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US markets see Happy Days again

Consumer demand
By Paul Hodges on 20-Jan-2014

US house, jobs Jan14New Year optimism over the economic outlook is breaking out all over the USA.   Weak employment numbers for December were ignored, as were weak data on housing markets.  Whilst prices for benzene, the blog’s favourite sentiment indicator, not only jumped to a record high but dragged European levels to an all-time record as well.

Happy Days are clearly here again.

The problem is that the data doesn’t support the optimism.  And not just the short-term data, but the more important long-term data, as the charts above show:

  • The percentage of people employed, the participation rate, is back at 1978 levels of 62.8% (left chart)
  • Annual 2013 housing starts at 923k were still below the lowest figure ever seen before 2007 (right chart)

The detail of the numbers is also very worrying:

  • The number of Americans employed in December at 136m was still 3m below the November 2007 peak.  There has never before been a period when employment has failed to recover to previous levels.
  • Even more importantly, the improvement in housing markets since 2009 seems now to have come to a halt.  Higher interest rates have taken levels of refinancing back to those last seen in 2000, whilst Americans with average credit scores still find mortgages difficult to obtain

Markets are at their most dangerous when they take leave of the real world and run solely on sentiment.  The US market moved into melt-up mode in May, and this was confirmed in November with the record $142m price for a Bacon painting.  It thus seems only appropriate that we now learn this was bought by the former wife of casino billionaire Stephen Wynn.

Those who run casinos are clearly at home with today’s market movements.  And with net worth of $1.9bn, the former Ms Wynn probably won’t worry too much about what happens to her painting’s value in the future.  But for the rest of us, in the real world, it seems a bit late to be jumping on last year’s trend

Or, as the Financial Times headlined a major analysis. “Valuations: Is This Nuts?”

The blog thus believes the ‘Two Steps and a Stumble’ scenario is worth watching very carefully.  Given today’s optimism, retiring Fed Chairman Ben Bernanke may well decide to taper his stimulus by another $10bn at his final meeting later this month.  If he doesn’t, markets would presumably become worried about what worried him.

So that would be the Two Steps.  Then next month, the pressure would be on new Chair Janet Yellen to taper by another $10bn.  In the past, when interest rates were rising, markets used to shrug off the impact of the first two increases.  But by the third, reality began to dawn that things were not looking so good after all – hence the ‘Two Steps and a Stumble’ motto.

As American humourist Mark Twain once wisely noted, “history doesn’t repeat itself but it does rhyme”.

Benchmark price movements since January 2013 with ICIS pricing comments are below:
PTA China, down 19%. “Weaker performance in the downstream polyester sectors continued to add downward pressure”
Brent crude oil, down 5%
Naphtha Europe, down 3%. Prices fell below $900/t, pulled down by a steep fall in Asian prices and weak domestic petrochemical demand combined with poor gasoline uptake ”
Benzene, Europe, up 3%. Soaring US spot numbers and healthy January demand has pushed European numbers comfortably above the $1,550/tonne mark to record highs”
HDPE US exportup 14%. Demand remains weak in Asia, and with the Mexican peso weakening against the US dollar, local resin is becoming more competitively priced”
US$: yen, up 19%
S&P 500 stock market index, up 25%