Earlier this week we discussed the very poor condition of the corn crop’s spring planting. Apparently, corn speculators are taking the data to heart. The chart below shows the percentage of outstanding open interest that represents the number of contracts speculators hold long net of their short positions. This data is released weekly in the CFTC’s Commitment of Traders report. As shown, corn speculators have abruptly about-faced from a historically large short position to a very small long.  Start a two-week free trial to Bespoke Institutional to track futures positioning across asset classes.

The change has been one of the largest in the last 20 years, equivalent to 11.4% of open interest. In other words, as corn prices have surged, positioning has been cleared out. That could be a good sign for where prices head next if you assume that speculators are going to keep pushing contracts higher by building longs. On the other hand, with positioning now cleaned out, the contrarian view is that markets are vulnerable to bearish moves now without large and vulnerable shorts that are sensitive to price moves higher.

Despite a light data slate, there were not too many bright spots this week as only four of the fourteen releases showed improvements from the prior period or beat estimates; the rest came in weaker or missed forecasts.  The Chicago Fed’s National Activity Index was the only release on Monday coming in weaker than both March’s reading and consensus estimates.  Similarly, April Existing Home Sales was the only release Tuesday, and results were once again weaker than expected.  While Initial Jobless Claims on Thursday were better than expected, Continuing Claims missed by 10K. Flash PMIs were very weak for both manufacturing and the services sectors.  Friday morning, advanced manufacturing orders, sales, and inventories all disappointed (we covered in an earlier post).  Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

Activity picks back up next week with 27 releases on the docket.  Due to Memorial Day holiday, markets will be closed, and no data is to be released on Monday. But on Tuesday things pick back up with multiple home price indices.  The quarterly House Price Purchase Index for Q1 will come out in addition to the FHFA House Price Index and S&P CoreLogic Case-Shiller Index for March.  More housing data will be out on Thursday with Pending Home Sales.  The Conference Board’s Consumer Confidence for May and the Dallas Fed’s Manufacturing Activity Index will also be released Tuesday, and both are expected to show an increase.  The Richmond Fed will follow that up with their own manufacturing index on Wednesday, similarly expected to increase relative to April. In addition to the typical weekly data on Thursday, the second release of Q1 GDP will be out.  While consumption and inflation are expected to be unchanged from the initial release, GDP is expected to be 0.1% weaker.  Personal Income and Spending for April is due out in what will be a busy Friday. While income is expecting an uptick, spending data is forecasted to be considerably weaker.  The Fed’s favored inflation gauge, PCE, along with the Chicago PMI and University of Michigan Sentiment will round out the week on Friday.

This morning’s advance report on April manufacturing new orders, sales, and inventories was a pretty notable disappointment. The advance report only provides data on durable goods industries, which are revised at a two week lag when numbers for nondurable industries are added too. In addition to missing expected MoM changes (which were already pretty modest), the report saw downgrades to March as well. We tend to be careful about reading too much into MoM numbers in the report due to its volatility and high level of revisions. In the chart below we show the rolling 3 month average for durable goods orders and shipments relative to the prior 3 months’ average level, annualized. As shown, shipments are really diving, while new orders are of course falling too.  Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

One indicator within the report that gets a lot of attention is the “core capex” proxy. This number tracks sales (shipments) of non-defense capital goods, which is a good proxy for how much businesses are spending on equipment capital expenditures. As shown, aircraft shipments have slowed sharply, changing things from bad to worse relative to ex-aircraft numbers. Those are still growing, but relatively slowly.

We also like to strip out the most volatile components of durable goods. These aren’t capital goods only (like the above series), but we do strip out the most volatile categories of durables. As shown, this measure’s orders number is now down 2.2% annualized on a 3m/3m basis, the lowest since 2016, and shipments (which are included in GDP calculations, unlike new orders) are only barely positive.

Finally, and arguably most concerning, is that over the last few months inventories have started to pile up rapidly. As shown in the chart below, inventory-sales ratios have been climbing for some time, but the uptick has been especially dramatic in the last 2 to 3 months after revisions released today. Both are now firmly above the 2010-Current average for these numbers and represent excess production relative to demand; that’s a bad sign for the outlook in the manufacturing sector.

Below are relative strength charts (vs. the S&P 500) for the Technology and Utilities sectors.  In the chart, when the line is rising, the sector is outperforming the S&P 500, and vice versa for a falling line.  In each chart we provide dots for days that the FOMC made a rate decision.  Blue dots are days when the Fed left rates unchanged, while red dots are days when the Fed hiked rates.

While the Fed kept rates unchanged at its most recent meeting, it marked a key turning point for the cyclical Tech sector and the defensive Utilities sector.  Since the last FOMC meeting, Tech has seen its relative strength plummet as investors have shifted quite dramatically into defensives like Utilities.

The rally for Utilities and decline for Technology have done a number on valuations for the two sectors, to the point where their trailing 12-month P/E ratios are nearly the same.  Tech’s P/E currently stands at 20.52, well below the reading near 24 it had in late 2018.  Utilities has seen its P/E balloon above 20 up to 20.10 as of this morning, which is nearly 5 points higher than it was at the end of 2018.  When a no-growth sector like Utilities has a P/E that’s similar to a growth-oriented sector like Tech, it doesn’t say much about the confidence of investors.