Whether or Not it’s the Weather, the Economy Is Definitely Slowing

The weather has certainly been bad . . . but some of last week’s economic data suggests that the weakness is not just weather-related (e.g. construction jobs have held up relatively well, online sales have been weaker than those of bricks-and-mortar.)

  • January retail sales fell, and December was revised down.
  • With sales soft, the retail inventory:sales ratio ticked up. The factory-level ratio has also ticked up; the wholesale ratio has not.
  • Industrial production fell 0.3% in January. Manufacturing output fell 0.8%, while the cold weather boosted utility output 4.1%.
  • Capacity utilization slipped from 78.9% to 78.5%.
  • Bucking the negative trend, the NFIB small business sentiment index rose 0.2 to 94.1.

GDP US Quarterly Forecast

It’s not weak enough yet for the Fed to signal they might slow the QE taper, but the stock market seemed to display a “bad news is good news” complacency.

Speaking of the Fed – Is Yellen Better than Bernanke?
Janet Yellen’s House testimony signaled no intention to change policy from that under Bernanke. Those who hoped she’d sound more dovish were disappointed.
Comment: I believe Yellen built up huge credibility with Congress this week. She offered to stay longer; she didn’t evade, mumble, or obfuscate; she knew her stuff, and she never went off-script. As they say at the Olympics, she nailed it. It’s her Fed now. (p.s. I think this is what Bernanke wanted and why the Fed started the taper during his term: to facilitate a seamless transfer of authority.)

In Washington: The Debt Ceiling was Raised, Another Obamacare Mandate was Delayed

  • Congress approved legislation that extends Treasury’s borrowing authority into 2015.
  • The Obama administration said employers with 50 to 99 workers won’t be required to comply with the “employer mandate” of the Affordable Care Act until 2016.
  • The Department of Energy approved another LNG export license (good for Japan and domestic producers, bad for domestic energy consumers).
  • Through the first four months of the government’s fiscal year (1/31), the federal budget deficit was $144 billion, versus $290 billion a year earlier. Receipts are up 8.2% year over year (y/y), spending is down 2.8% y/y.

In Europe: The Economic Recovery Continued, though the Italian Government Fell
With unemployment approaching the level where the Bank of England had previously signaled rates would start to rise, the bank effectively moved the goalposts by revising down its estimate of full employment and pointing to low wage growth while saying interest rates “may need to remain at low levels for some time to come” before beginning to rise on a “gradual path” to a level “materially below the 5 percent level set on average by the committee prior to the financial crisis.”

  • In continental Europe, fourth quarter flash gross domestic product was up 0.3% quarter over quarter (q/q) and 0.5% when compared with the same quarter a year ago. This was the first positive annual reading since the fourth quarter of 2011. Each of the four largest states reported growth: Germany 0.4%, France and Spain 0.3%, and Italy 0.1%. All nations except Cyprus, Finland and Estonia reported growth.
  • Italian Prime Minister Letta resigned on Friday, victim of an insurgency from within his own party led by Matteo Renzi, a former mayor of Florence. Renzi will now seek to form a coalition which he will lead as Prime Minister: his negotiating counterparties include Beppe Grillo of the anti-establishment Five Stars party and Angelino Alfano, who led the insurgency which toppled Berlusconi from power. Renzi’s key message is that more rapid and more dramatic structural reform in Italy is needed.

In Asia-Pacific: China Data Strains Belief, Japan Looks Soft

  • China reported a suspiciously high trade surplus; “hot money” inflows disguised as payments for exports are suspected.
  • Japanese core machinery orders, a leading indicator of capital spending, dropped in December. Other data points also suggest the economy has weak momentum going into the big April tax increase.
  •  Comment: The Japanese stock market continues to move in the opposite direction as the yen. YTD returns (strong yen, weak stock market) are in the opposite direction of longer-term trends—but also in the opposite direction of what may have become a pretty “crowded” trade. It’s unclear whether we’re seeing a within-trend correction or trend reversal. Either way, the “hot” money is creating a lot of volatility.
  • Maybe this isn’t just about Japan’s money-printing: Maybe there’s a flight to safety by Asian investors: the yen is the world’s strongest major currency ytd despite major Quantitative Easing by the Bank of Japan, and the yield on the 10-year Japanese Government Bond (JGB) is at a three-month low.

Last Week in The Capital Markets

  • Currencies: Most currencies ended slightly higher against the dollar last week, with the euro and yen rising a bit less than 0.5% and most emerging market currencies up 0-2% against the dollar. The Chinese currency, which continues to be managed in a very tight band against the U.S. dollar, declined slightly; it’s down just a touch ytd. The euro is down a bit versus the dollar ytd, while the yen is up roughly 3%.
  • Bonds: Neither weaker-than-expected economic data nor perhaps more hawkish-than-expected Yellen testimony rattled the U.S. bond market: the 10-year Treasury yield rose 4 basis points (bps) to 2.75% in a quiet week, while the 10-year TIP was up 6 bps to 0.59%. For the week, the total return of the BarCap Aggregate Bond Index was down a touch; the BoA Merrill Lynch High Yield Index was up about 0.5%. The 10-year JGB yield fell to 0.59%, a three-month low; the 10-year German Bund yield rose 2bps to 1.68%.
  • Equities: For the week, the S&P 500 Index returned 2.4%. Utilities (+3.6%) led; Financials (+1.6%) lagged. MSCI Europe (+2%) and MSCI Emerging Markets (+1.6%) also rallied. The MSCI Japan Index ended the week down 0.6%, selling off Thursday and Friday on Yen strength. With about 400 of the S&P 500 companies having reported, aggregate earnings are modestly ahead of expectations; over 70% of companies have beaten consensus expectations.
  • Commodities: Gold rose 4% as assets in the SPDR Gold Trust, the biggest ETF backed by gold, rose for a third straight week, reaching the highest level since late December. WTI oil was up 0.3%.

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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