Morgan Stanley Says Business Conditions Remain In "Expansionary Territory"

Morgan Stanley's MS business conditions index remains "expansionary" after it's recent pull back in August. MSBCI was at 77 percent, a 12-month high for July, before it pulled back to 69 percent in August. Advanced bookings increased (from 62 to 78) since Q1 2014 while CapEx plans decreased (from 64 to 60). Only 31 percent of respondents reported increasing CapEx over the next three months.

The Hiring Index over the past three months fell 6 points to 51 percent while plans for hiring over the next three months improve 1 point to 59 percent.

Credit Conditions continued to tighten, maintaining the downtrend that has been in place since 2009.

The pressure on business development is apparent in the recent disconnect in Business Development ETFs and the S&P 500 e-mini futures.  Shares of the three ETFs have broken their uptrends this summer:

• BDCL - E-Tracs 2x Leveraged Long Wells Fargo Business Development Company ETN (Chart - S&P 500 E-Mini in Pink)
• BDCS - E-Tracks Linked To The Wells Fargo Business Development Company Index (Chart - S&P 500 E-Mini in Pink)
• BIZD - Market Vectors BDC Income ETF (Chart - S&P 500 E-Mini in Pink)

Conditions have tighten as we continue to approach the end of the FED's QE program.  Many of the pundits on the street have been looking for corporate and government bond rate increases to cause problems in business development and they won't find them.  The reason for this was stated by Wunderlich analysts this morning:

"Thanks to the fact that Fannie Mae continued to liquidate more MBS than it issued in May, the net supply of agency MBS continued to be negative through May. We believe this is the reason why tapering large scale asset purchases has not resulted in unusual bond market volatility".

Business conditions will continue to come under pressure as companies continue with "inversions" in light of the expectations that the ECB will stimulate it's economy to fend of slowing inflation.  Even thought conditions may remain "expansionary", the investor discomfort in development ETFs may signal the pending slow-down that is expected to come ahead of a Fed rate hike.