Economic Notes – May 13, 2013


Written by: Jon McGraw

So much economic data was packed into the previous week, last week appeared quite light by comparison.

(+) The Federal Reserve’s Senior Loan Officer Opinion Survey, which polls 68 U.S. banks and 21 domestic branches of foreign banks, has tended to be a good predictor of upcoming business investment. Over the months between the last survey in January through the current period ending in April, it appears commercial/industrial lending standards have eased (the component of loan ‘supply’) and that a modest increase in demand for loans has taken place across the board as well.

In fact, it demonstrates that the net percentage of banks easing lending terms to mid/large-sized firms has reached its highest level since the third quarter of 2011. Terms for smaller firms also improved on the magnitude of ~15% fewer loan officers reporting tighter standards (the lowest level since the 2nd quarter of 2005); this segment has experienced a more difficult environment over the last several years compared to the environment for larger companies. Loan standards and demand for commercial real estate has also dramatically improved over the quarter and year, as did conditions for prime residential mortgages (however, ‘non-traditional’ and sub-prime remained unchanged) and FICO scores continue to be an important factor post-crisis (at least relative to pre-crisis). In other consumer loan activity, such as installment loans and credit cards, conditions looked to have eased a bit as well although standards here are also at a higher level than they once were. Another mixed positive is that consumer demand for revolving credit hasn’t moved up dramatically.

(+) Elsewhere, on the other side of the lending equation, seasonally-adjusted MBA mortgage delinquencies for the first quarter of 2013 rose 0.16% to 7.25%, but remain below that of a year ago by a similar 0.15% (delinquencies include loans that are at least one payment past due but are not in the process of foreclosure). ‘Serious’ delinquencies (those which are 90 days+ past due and/or have begun the foreclosure process) came in at 6.39%, about a percent lower than this same time last year. (For those curious, the delinquency rate on sub-prime fixed loans rose about a percentage point to over 20%.) Actual total loans in the foreclosure process came in at 3.55% for the quarter, 0.84% better than last year and the lowest level since 2008. This may not be surprising, but affirms solidifying/improving conditions in residential real estate.

(0) Wholesale inventories rose +0.4% for March, which was a tick above the forecasted +0.3%. Durable goods inventories rose by a half-percent while those for non-durable goods barely moved upward.

(+) Initial jobless claims for the May 4 week declined to 323k, a better result than the forecasted figure of 335k and represented the lowest reading since Nov. 2007 (a month before the recession began officially). The four-week moving average declined from 343k to 337k. These continue to improve; it’s not obvious week-to-week, but more apparent on a chart. Continuing claims for the April 27 week came in at 3,005k, which was lower than the 3,018k expected.

(0) In other jobs data, the government JOLTS reports for March showed a larger than expected number of job openings, at 3,844k (versus a forecasted level of 3,770k), but was still down from February’s level. The hiring rate continues to be low in the post-recession period and was unchanged on the month at 3.3%. The quit rate declined by a tenth of a percentage point (to 1.6%), which is a slight negative due to the signaling factors embedded in larger numbers of workers leaving their jobs voluntarily, while the involuntary firing rate rose just a tenth. All-in-all, the results were largely in line with last month’s official employment as well as other labor data.

The Markets

Markets were positive for the third straight week and the Dow hit 15,000 for the first time—that type of news alone can make the market move higher at times, since a newsworthy and therefore behaviorally important technical level is reached.  Industrials and consumer discretionary stocks led the way, while defensive utilities and consumer staples lagged.  Small-caps outperformed large-caps by a wide margin on the week.

It has puzzled some analysts that this rally has been steadfast amidst some softer spring economic data and an underperformance in ‘cyclical’ names.  However, the same pattern occurred in the mid-1980’s and mid-1990’s where cyclicals underwhelmed somewhat.  This seems to be the case for a variety of reasons, including weak global growth outside of the U.S. (especially in certain emerging market nations, like China) and a large amount of spare capacity following the 2008 bust that hasn’t fully been put back into use.

Additionally, there has been strong interest in the lower-beta and dividend-yielding characteristics of more defensive sectors, which has buoyed their performance over the past several years during which investors have remained skittish and have sought better income alternatives to bonds.  Will this continue?  It’s possible, but as economic growth improves, other market lagging market sectors (such as technology and some industrials) may show better participation.

Overall, we look at this as perhaps the second of several phases in the asset class’ performance (and valuation) run.  Last week represented the 18th consecutive week of equity fund inflows (according to Lipper), which has begun to show a pattern of increasing investor interest in stocks again.  However, sentiment has started from a very low base.  As we know from our behavioral market studies and tendency for many to invest by looking in the rear-view mirror, performance can attract additional inflows over time.  This self-fulfilling prophecy is a likely source of the academically-documented momentum effect and could keep flows headed in stocks’ direction for some time (these trends, once started, tend to be persistent).  This is not to mention an improvement in underlying fundamentals and/or disappointment in the returns in other asset classes (like bonds, if interest rates begin to rise).

Foreign stocks in both developed and emerging regions gained as well, albeit not as strongly as in the U.S.  China was the higher-profile winner on the week, although the best results came from lower-profile EM nations, such as Malaysia and Indonesia.  China’s export growth unexpectedly rose in April, resulting in a trade surplus (the opposite of March) although shipments in the U.S. and Europe fell (so some are questioning the validity of the report).  Nevertheless, it helped market sentiment.  The other mentioned names in the region, as trading partners, piggybacked off the news to some extent.

Bonds overall had a down week as Treasury yields inched up in the midst of $66 billion in new supply and other bonds also sold off in various degrees.  However, the mixed-to-positive economic and earnings data boosted areas like floating rate.

Developed market foreign rates rose in the U.K. and Germany as manufacturing data was surprisingly good and sentiment improved—which affected bond prices downward.  Emerging market debt performed a bit less negatively, but lost ground nonetheless.

The Yen broke the 100 Yen = 1 USD$ mark for the first time in several years as stimulus is working at least to drive the Yen’s value down, as intended.  In other foreign bond markets, floods of cash into Australia and New Zealand particularly, have prompted the leaders of those two central banks to cut interest rates (Aus.) and sell currency units (NZ) in an effort to stem the appreciation of those currencies.  To a lesser degree, appreciation has spurred central bank action in Thailand and the Philippines.  This flood of incoming money has occurred for natural reasons:  higher interest rates, growing economies and emerging market ‘exposure’ has enticed investor interest in both equity and debt (primarily the latter).

While nations seek currency stability and strength to a certain degree, more expensive currency values can hurt exports and tourism dramatically, and therefore economic growth.  Several other nations cut rates last week, including Korea, India and Poland, which could also serve to stem currency appreciation in those nations.  The race to the bottom continues, which has been a primary catalyst for the minor USD rally in recent months.

In real estate markets, U.S. industrial/office and residential property names performed positively and largely in line with equity markets, while retail and European names only gained about half as much.  The detractor on the week was the Asian REIT area, which lost ground on the order of almost 4%, a bit more dramatic than equities from the region.

Commodities were generally down on the week about a percentage point, with the winning contracts being coffee, unleaded gas and a variety of industrial metals (copper, nickel and tin) all reflecting better expectations about global growth and perhaps some ‘value’-buying in the commodities space.  Grains, such as wheat and corn, significant ground on the week (upwards of 2-4%) with optimism about planting conditions and weather projections for the summer being perhaps less extreme and destructive to supplies than during the last several years.  Gold also experienced another negative week as investors felt better about things.  Despite the dramatic declines lately, gold prices have recovered a bit from lows in April, retracing over half of those losses (a typical technical thing for prices to do).

Have a great week!