March – In Like a Lion? Not as Far as The Economy is Concerned

Last week’s U.S. economic data was again on the soft side, but we still can’t rule out bad weather as the cause. New factory orders for durable goods were down 1% month over month (m/m) in January but up 4.6% year over year (y/y). Excluding the volatile transportation segment, they were up 1.1% m/m and 1.2% y/y. This is consistent with bad weather superimposed on a slowly-growing economy – no big surprise. In other data:

  • The Markit flash services PMI fell from 56.7 to 52.7 . . . still above 50.
  • The Chicago Fed’s National Activity Index fell to  – 0.39
  • The (local-focus) Chicago-area PMI was strong, at 59.8.
  • The Kansas City Fed index came in at +4, even after citing weather as a headwind.
  • The Richmond Fed index fell to -6 . . . details were weak . . . weather is blamed.
  • The Dallas Fed’s February Manufacturing Outlook Survey showed general business activity, at 0.3, barely in positive (slow-growth) territory. However, factory activity was notably strong, rising for the tenth month in a row.
  • Initial unemployment claims rose to 348k – the high end of the recent range.

Last Week’s Housing Market Data Was a Little More Upbeat

  • The Case-Shiller 20-city home price index was up 13.5% y/y in December . . . but down m/m for the second consecutive month . . . so the rate of growth is slowing rapidly. Given the lags in the Case-Shiller data series (this data point is an average of the three months of Q4), weather isn’t implicated.
  • The (broader) Federal Housing Finance Agency (FHFA) house price was up 7.7% y/y in December – its tenth consecutive quarter/quarter increase.
  • January new home sales, at a seasonally-adjusted annual rate of 468,000, were well above expectations. Inventories of unsold new homes are relatively lean (a positive for future homebuilding activity). Note: last week, existing home sales were weak . . . the truth is probably in the middle.
  • Mortgage applications were down again, but it was a holiday-shortened week. They’re way down y/y.
  • The average 30-year conforming mortgage rate rose 5 basis points (bps) to 4.50%.

New Homes Supply Eases

Q4 GDP Is Encouraging

  • As expected, Q4 real GDP was revised down; the rate of growth was revised down from 3.2% (annualized) to 2.4%. That’s roughly a $30 billion reduction.
  • Exports were revised down by $10 billion—that’s the only real “bad news.”
  • Personal consumption expenditures were lowered by $20 billion . . .but personal savings (which aren’t counted as part of GDP) rose by $20 billion. That’s good news, not bad news: current savings are future personal consumption expenditures – low savings put future demand at risk.
  • The increase in inventories was reduced by $10 billion . . . that’s also good news: lower current inventories mean more future production, and vice versa.
  • Nonresidential fixed investment was revised up by $17 billion.
  • The other components didn’t move enough to warrant mention.

The U.S. Budget Deficit Has Declined
The Deficit for fiscal 2013 shrank to $680 billion … its lowest level since 2008.

  • The y/y decline was the biggest since the end of World War II.
  • Credit goes to the fiscal cliff tax hikes (more revenues), economic growth (more revenues) and spending restraint.

Fed watch: More Evidence that Forward Guidance is Not Yellen’s Preferred Tool

  • Janet Yellen testified before the Senate Banking Committee, saying little or nothing new – a dovish tone, on balance, willing to slow the taper if the economy weakens, but the hurdle rate to do so is relatively high.
  • The Fed intends to end quantitative easing (QE) this year while keeping the Fed Funds rate low, but the path is data-dependent. The Fed is deliberately not offering clear forward guidance to the market. Next Fed meeting: March 18-19.

In Europe: Data Still Signaling a Slow Recovery

  • Eurozone CPI was up 0.8% y/y.
  • Eurozone unemployment rate remained at 12%.
  • Revised German Q4 GDP showed growth of 1.3% y/y, in line with the flash estimate, with strong exports offset by weak domestic demand.
  • In Italy, the new Renzi government seems to be off to a good start.

In Japan: Data Generally Positive
Industrial output rose and the February manufacturing PMI was 55.5. The jobless rate held steady at 3.7%. Retail sales and household spending rose. Inflation is trending higher.

In Ukraine: Risks Continue to Rise

  • As I feared/predicted last week, Russia has sent troops into eastern Ukraine (Crimea), ignoring White House objections, warnings, and threats. I expect Putin to ignore the UN as well. He’s protecting citizens loyal to a duly-elected government which has formally asked Russia to intervene to contain an illegal uprising/insurgency.
  • Talk about “respecting the national integrity” of the Ukraine may backfire on the West: the Eastern part of the country wants to stay with Russia; a peaceful partition might be the best outcome the West can hope for.

Last Week in the Capital Markets

  • Currencies: The euro and yen each gained roughly 0.5% against the dollar. The Chinese yuan fell 0.9% last week, its biggest weekly decline on record. In the last 45 days, it is down 1.7% from its peak, back to its lowest level since May 2013.
    • On Friday, apparent central bank intervention drove the yuan to its biggest one-day fall since the currency’s peg to the dollar ended in 2005. The most likely motive of the Peoples Bank of China (PBoC) appears to be preparation for further liberalizing the currency regime and “re-educating” those who thought an appreciating yuan was a one-way bet by introducing two-way risk.
  • Bonds: Both long duration and low credit quality were rewarded last week: the 10-year Treasury yield fell 7 bps to 2.66%; the 10-year TIP yield fell 12 bps to 0.49%. Credit risk was rewarded also: high yield spreads tightened 9 bps to 381, a new cycle tight. Eurozone and Japanese sovereign yields generally declined; in Europe, peripheral spreads generally tightened.
  • Equities: For the week, the S&P 500 Index was up 1.3%. Within the S&P 500, retailers lifted the Consumer Discretionary sector (+2.5%) to the lead; Telecom Services and Utilities (-0.5% and -0.3%) lagged. MSCI Europe and MSCI Emerging Markets were roughly flat; MSCI Japan (-0.8%) lagged (as the Yen strengthened again).
  • Commodities: WTI oil and gold were each up fractionally.

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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