Slow Growth for the Economy but Weather Effects Fading

Do you believe Putin’s words or actions? Putin continued to say he wanted a diplomatic solution to Ukraine while continuing to mass troops along the Ukrainian border. Meanwhile the International Monetary Fund (IMF) approved a line of credit of up to $18 billion to Ukraine and the Ukrainian parliament passed a law to implement IMF-demanded austerity measures. The “West” cancelled a G8 meeting scheduled for Sochi, and so the G8 reverts to the G7 with the expulsion of Russia.

U.S. Economic data: mixed, consistent with slow growth and fading weather impacts.

  • Q4 Gross Domestic Product growth was revised from 2.4% to 2.6% (annualized) on higher consumer service-sector spending . . . no surprise.
  • The Chicago Fed’s National Activity Index moved back into positive territory in February.
  • The durable goods orders report was mixed: ex-transportation, orders were up 1.5% year over year (y/y).
  • Markit’s March flash manufacturing and services indexes each came in at 55.5.

Housing data: more signs of a flattening out.

  • February new home sales were down 1.1% y/y.  Inventories are moderate, so overbuilding is not yet a concern.  If sales don’t pick up in the spring, though, concern will rise.
  • February pending home sales slipped 0.8% month over month (m/m) . . . the ninth consecutive month of declining volume.
  • Purchase mortgage applications rose week over week but are still down 17% y/y.  The average loan rate rose 6 bps to 4.56%.
  • The median new home price is down 1.2% y/y.

Initial unemployment claims drop again.

  • Initial unemployment claims for the week ending 3/22 came in at 311k . . . close to cycle lows.

The consumer sector remains moderately healthy.

  • Personal income was up 0.3% m/m and 3.1% year over year.
  • Q4 consumer spending was revised upwards from 2.6% to 3.3% and rose 0.3% month over month and 3.0% year over year.
  • Consumer confidence is OK, but not great.  The Conference Board’s consumer confidence index came in at 82.3; the U of Michigan consumer confidence index came in at 80.

Consumer Spending 140328

Inflation remains negligible.

  • Personal Consumption Expenditure (PCE) inflation, the Fed’s preferred measure, was up 0.9% y/y at the headline level, 1.1% at the core level.

Eurozone: the economic news was mixed, which isn’t bad, considering the Ukraine situation.

  • The Eurozone (EZ) March preliminary manufacturing Purchasing Managers Index report came in at 53.0.  Germany (53.8) was weaker than expected; France (51.9) was better (above 50 means expansion).
  • The EZ Services Purchasing Managers Index came in at 52.4 (France was 51.4, Germany 54.0).
  • German business sentiment dropped for the first time in five months.
  • The European Central Bank (ECB) signaled it could ease further if deflation risks increase or the Ukraine becomes a headwind to the Eurozone economy.

China: more evidence of a slowdown, some talk of stimulus.

  • The HSBC/Markit China manufacturing flash PMI fell to 48.1 in March, its third consecutive monthly decline and its lowest level in eight months.
  • The World Trade Organization said China violated trade rules by restricting the export of rare earth materials.
  • Chinese auto manufacturer Dongfeng is buying a 14% stake in French automaker PSA Peugeot Citroen.

Japan: waiting to see the impact of the tax hike.

  • Inflation was up 1.5% y/y; excluding food and energy, it was up 0.8%.
  • The unemployment rate dropped from 3.7% to 3.6%.
  • A number of data series are pointing to improving sentiment.
  • The sales tax (VAT) rises from 5% to 8% on April 1.
  • March 31 is the Japanese fiscal year-end: “window-dressing” may temporarily distort markets.

Last week in the capital markets: International equities rally while the U.S. consolidates; yields are stable.

  • Equities: MSCI Emerging Markets was up 4.3%; MSCI Japan was up 3.7%, and MSCI Europe returned 1.6% last week.  The S&P 500 returned -0.4% last week.
  • Bonds:  The 10-year Treasury yield fell 2 bps to 2.73%; the 10-year TIP yield fell 1 bps to 0.60%.  The OAS of the BoAML HY declined 3 bps to 373, a new cycle low
  • Commodities: WTI oil was up about 2% on lower inventories; gold was down about 3%.
  • Currencies: The dollar gained about 0.5% against the Yen and 0.2% against the Euro.  The Chinese Yuan ended the week up 0.2%, breaking a string of weakness.  EM currencies were generally up against the dollar.

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