Everyone Seems to be Reaching the Same Conclusion About Global Growth: It’s Improving

Observations on the Capital Markets – Week Ended January 17, 2014

The OECD’s (Organization for Economic Cooperation and Development) leading indicators showed the global economy accelerating in November. The World Bank raised its 2014 global GDP growth forecast from 3.0% to 3.2% (versus 2.4% in 2013). It expects U.S. growth of 2.8% in 2014, up from 1.8% in 2013. The bank cut its emerging market growth forecast, though, saying sustainable growth rates have declined.

International Monetary Fund Managing Director Christine Lagarde also forecast accelerating global growth in 2014, led by the advanced economies, saying (no news flash here) that the worst-case scenario had been avoided but that risks remain.

Finally, the Fed’s Beige Book portrays a strengthening economy with few bottlenecks. Nine of the twelve Fed districts characterized economic growth as “moderate” in the latest Beige Book; for most, the outlook is for steady or accelerating growth. Manufacturing is leading, with eleven districts reported both growing sales and an optimistic outlook. Nine of the twelve districts noted rising retail activity; eight noted increased hiring. Most districts report seeing little upward pressure on wages and prices.

U.S. business conditions appear to be improving further

  • The fifth consecutive month over month(m/m) increase in manufacturing output lifted December industrial production 0.3% m/m (3.7% year over year (y/y)).

Everyone Seems to 1

  • Capacity utilization ticked up from 79.1% to 79.2%
  • The NFIB Small Business Optimism Index rose to 93.9 on strength in sales expectations, earnings trends, capital outlay plans and expansion plans.
  • The Empire State Manufacturing survey, a relative laggard recently, jumped to 12.5 on better new or-ders. Details also suggest that pricing power is beginning to return to the B2B (business to business) mar-ket: prices paid (input costs) rose.
  • With just over 50 S&P 500 companies reporting so far, earnings and revenues are generally in line with expectations.

The JOLTS employment report delivered no jolt . . . just a little more labor market strength

  • The Bureau of Labor Statistic’s JOLTS report showed over 4 million job openings at the end of November, a level last seen in March 2008. Other components were unremarkable.
  • Initial unemployment claims came in at 326k . . . fine . . . in the right range.

Retail sales and inventories point to stronger Q4 and Q1 growth

  • Retail sales rose 0.2% in December, following a 0.5% November gain. Spending ex-autos and gasoline rose 0.7%, following a 0.1% November gain. Either way, the cumulative two-month growth points to an up-ward revision in Q4 GDP estimates.
  • The retail inventory:sales ratio was steady at 1.43. This, combined with last week’s report of lower factory and wholesale inventory:sales ratios is bullish for 2014 GDP. Recall that inventory growth was a large contributor to Q3 growth; if sales and shipments did not follow, a slowdown was likely. With Q4 sales strong, inventories are not excessive.

Housing is shaping up to be a modest-moderate tailwind to GDP growth in 2014

  • Both purchase and refinance mortgage applications jumped over 10% week/week as the average rate for conforming (30-year, $417,000 or less) mortgages fell 6 bps to 4.72%. Homeowner equivalent of buying the dip? Pent up demand?

More cooperation from Congress

  • The House and the Senate passed legislation funding the government for the rest of the fiscal year (through October).
  • Legislation to restore emergency extended unem-ployment benefits seems to have lost momentum.

Affordable Care Act watch: the new enrollment data points to trouble

  • Accenture has been hired to finish and run the Healthcare.gov website.
  • New data on enrollments is bringing “adverse selec-tion” (those who will be subsidized are signing up; those who won’t, aren’t) into focus as a risk/problem. Comment: this is not a software bug or black swan. It’s the result of the law’s poorly-designed incentive structure. Asking/expecting healthy young people to buy something very expensive, overpriced (to fund the subsidies), and not really needed was asking for trouble—especially when there was/is little down-side for not doing so.
  • The enrollment deadline is March 31. If the final customer base isn’t younger/healthier, premiums won’t cover costs.

Last week in the capital markets: a pretty quiet week, considering

  • Equities: The S&P 500 and MSCI Japan ended the week down a bit; MSCI EM was up around 1/2%; MSCI Europe was up about 1.5%. Within the S&P 500, Information Technology led sector returns; Consumer Discretionary lagged.
  • Bonds: Bond markets posted small positive returns as the 10-year Treasury declined 4 basis points (bp) to yield 2.84%, and the 10-year TIP yield was down 1 ba-sis point, to 0.58%. High bond spreads (the BoAML High Yield Bond Index relative to Treasury yields) tightened 7 bps to 388.
  • Commodities: Oil was up just over 1% on lower in-ventories. Gold rose about 1/2%.
  • Currencies: The dollar was up marginally against the Euro and Yen. The Chinese currency ticked up to a new high.

Data Sources: The Wall Street Journal, Financial Times, Bloomberg.

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About Sam Wardwell

Sam Wardwell, CFA, is Senior Vice President and Investment Strategist at Pioneer Investments. He joined Pioneer in 2003.
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