Industrial activity posted a solid rebound in July, according to this morning’s update from the Federal Reserve. Production increased 0.6% last month, marking a robust acceleration from the flat-to-sluggish readings that have prevailed this year. July’s surprisingly strong rebound, in fact, is the biggest monthly gain since last November.
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US industrial production is expected to increase 0.1% in today’s July report that’s due later this morning vs. the previous month, according to The Capital Spectator’s average point forecast for several econometric estimates. The average prediction represents a slight deceleration in growth after the previous month’s 0.2% advance.
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● US retail sales rise a solid 0.6% in July
● US jobless claims inch higher, but 4-week avg at 15-year low
● Bloomberg’s US Consumer Comfort Index remains close to 2-month low
● US import prices slide in July, the most in 6 months
● Eurozone GDP rise 0.3% in Q2, slightly weaker than expected

Retail spending in the US jumped 0.6% in July, delivering an encouraging rebound from the previous month’s flat performance. The monthly gain could be noise, of course, but the sight of the year-over-year trend reviving as well suggests that consumer spending may be stabilizing, albeit at a lower level of growth compared with the peaks in recent history.
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Momentum and Markowitz: A Golden Combination
Wouter J. Keller, Adam Butler, and Ilya Kipnis
May 16, 2015
Mean-Variance Optimization (MVO) as introduced by Markowitz (1952) is often presented as an elegant but impractical theory. MVO is “an unstable and error-maximizing” procedure (Michaud 1989), and “is nearly always beaten by simple 1/N portfolios” (DeMiguel, 2007)… In our opinion, MVO is a great concept, but previous studies were doomed to fail because they allowed for short-sales, and applied poorly specified estimation horizons… In this paper we apply short lookback periods (maximum of 12 months) to estimate MVO parameters in order to best harvest the momentum factor. In addition, we will introduce common-sense constraints, such as long-only portfolio weights, to stabilize the optimization. We also introduce a public implementation of Markowitz’s Critical Line Algorithm (CLA) programmed in R to handle the case when the number of assets is much larger than the number of lookback periods. We call our momentum-based, long-only MVO model Classical Asset Allocation (CAA) and compare its performance against the simple 1/N equal weighted portfolio using various global multi-asset universes over a century of data (Jan 1915-Dec 2014). At the risk of spoiling the ending, we demonstrate that CAA always beats the simple 1/N model by a wide margin.
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● US job openings fall in June
● US weekly mortgage applications inch higher
● Is the Fed laying the groundwork for recession?
● China’s central bank: no reason for further currency declines
● Greek surprise: economic growth in Q2

US retail sales are expected to increase 0.3% in tomorrow’s July report vs. the previous month, according to The Capital Spectator’s average point forecast for several econometric estimates. The mean prediction reflects a modest rebound after the previous month’s 0.3% decline.
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US labor productivity rebounded in the second quarter rising 1.3%–a solid revival from Q1’s 1.1% decline (revised up from the previously estimated 3.1% decline). But the trend remains weak—productivity increased only 0.5% for the 12 months through June. Yet labor unit costs are rising at a much faster rate—up 2.2% in year-over-year terms through Q2. “What it means is that inflation could be more problematic down the road, but we haven’t seen it yet,” says Gennadiy Goldberg, an economist at TD Securities. “It’s something to think about long term.” For the moment, however, the Treasury market appears to be preoccupied with other matters, namely, the risk that disinflation is gaining the upper hand once again.
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● US productivity posts sluggish rise in Q2
● A modest rebound for small business confidence in US
● US wholesale inventories jump in June as sales tick slightly higher
● Slower growth for China’s industrial output and retail spending in July
● Eurozone industrial activity is weaker than forecast in June
● Decline in UK jobless claims in July beats forecasts

The Federal Reserve’s Labor Market Conditions Index (LMCI) eased slightly in July, ticking down to 1.1 from 1.4 in the previous month. The slightly positive value equates with a labor market that’s expanding, but at a sluggish rate. Yet translating LMCI’s historical record into recession risk estimates via a probit model still indicates that the broad macro trend remains positive for the US. That’s also the message in the jobless claims data and a real-time estimate of business conditions via market numbers. We’ll have a more reliable estimate of recession risk through July with the monthly update of the Economic Trend & Momentum indices that’s scheduled for later this month. Meantime, the early clues suggest that macro risk is still low for the US. To be precise, the current numbers suggest that the NBER isn’t likely to declare July as the start of a new recession.
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