Economic Notes – April 1, 2013

April
01

Written by: Jon McGraw

(+) Durable goods orders were stronger than expected overall for February, at a gain of +5.7% versus an expected +3.9% increase.  The ex-transportation component, however, lost ground of -0.5% for the month, which lagged the forecasted gain of +0.6%.  Finally, the ‘core’ capital goods group fell -2.7% versus a consensus drop of -1.1%.  In the underlying numbers, several metrics pared back from especially strong results in January, such as machinery orders.  On the positive side, shipments for non-defense-related capital goods ex-aircraft (related to the GDP input number) rose +1.9%, which beat expectations by about one-half percent.  A somewhat convoluted report, but the trend so far in 2013 has been positive.

(+) Personal income for February gained +1.1%, which was a positive surprise versus the +0.8% expected, and included a +0.6% gain in wage/salary income.  Along with the higher income, the savings rate also rose, as did consumer spending—up +0.7%, which was a tenth of a percentage point of a positive surprise.  The consumer response didn’t fall off as some expected due to the higher payroll tax rate this year; however, the primary driver for consumer buying was higher gasoline prices, which tends to be the less satisfying kind of spending for most people.  The PCE price index, which is used in GDP statistics and differs a bit in the calculation method from CPI, rose +0.39% on the month, which was below the forecasted +0.5% figure.  The core version of the same inflation index rose nominally, about 6 hundredths of a percent, just a shade below expected.  The difference between the headline and core, naturally, was the higher price of gasoline during the month.

(-) The Conference Board’s consumer confidence survey dropped strongly from February to March, to 59.7, versus an expected 67.5 reading.  The survey results were consistently less optimistic in several areas, including expectations for the future (which dropped more than the assessment of current conditions).  No doubt the sequester was a big part of this—as survey officials confirmed in their discussion.  The employment component was steady, however, in a continued trend of stabilization.  The future expectations part of this survey is notoriously fickle and subject to change based on headline events, so this is not as problematic as poor assessments of employment or current conditions, which are based on actual experiences as opposed to speculation.

(+) Ironically, the second and ‘final’ version of the University of Michigan consumer sentiment index did the opposite and rose from February to March ending at a level of 78.6, compared to an expected reading of 72.6 and reversed the bad mood of the earlier preliminary report.  The newly revised figure was largely due to better expectations, but opinions of current conditions were also better.  Administrators of the survey noted the sharp change of direction in sentiment, which may be due to less prevalent coverage of the political/sequester environment.  Again, these are very fickle.

(-) On the real estate front, new home sales fell -4.6% for February, which was a bit of a disappointment versus the -3.9% forecast.  This brought the annualized rate of sales nationwide to 411k and the year-over-year increase to +12%.  Sales weakness was strongest in the Northeast (down in the double-digits) and South (nearly 10%), but rose in the Midwest (up 14%).  The months supply of new home inventory ticked up by 0.2 last month to 4.4, but remains below the 4.8 figure from a year ago—steady improvement.  From a market segment perspective, the bulk of these homes being produced are in the $150-300k area (although the $300k+ market has caught up a bit in the past few years).

(+) The S&P/Case-Shiller home price index rose +1.0% for January, which surpassed the forecasted +0.8% level, and brought the yearly increase to +8.1%.  The hardest-hit cities from the real estate crumble again experienced the highest bounceback gains, including San Francisco, Phoenix, Atlanta and Las Vegas (all up nearly 2% on the month).

(-) Pending home sales moved down in February, at a rate of -0.4% for the month, which was just a slight disappointment comparative to the expected -0.3% decline and the +4% gain experienced in January.  Regionally, the midwest and west gained slightly while the northeast and south edged lower last month.

(-) The Richmond Fed manufacturing index came in at +3 for March, which lagged the +6 forecast.  Shipments, orders and capacity utilization all came in lower, so the lag was fairly widespread; however, the employment measure rose while wages remain tempered (the latter is useful in terms of an inflation evaluation).

(-) The Chicago PMI for March was weaker than expected, with a reading of 52.4 versus 56.5 expected—the results were led by poor data from new orders and production, and a small decline in employment.  However, the overall index remained positive, which was a sign of modest expansion.

(0) The second official revision of the fourth quarter 2012 GDP report was bumped upward again from +0.1% to +0.4%—good news, albeit less than the expected +0.5%.  The primary line item behind the revision upward was business fixed investment (non-residential structures, specifically), while consumer spending was revised downward slightly due to lower spending in the services area (the data for which tends to come in later).  While that quarter has been put to bed and confirmed to be in the ‘slow patch’ category, estimates for the first and second quarters of this year look to be better—more along the lines of 2.0-3.0%.  Estimates for 2014 look to be slightly higher than that, at 3.0-3.5%, but these are, of course, subject to change with broader conditions.  The housing sector (noted above) may add up to 1% of this

(-) Initial jobless claims for the Mar. 23 week rose a bit, to 357k, which surpassed the estimate of 340k.  Although there were some annual seasonal adjustments made, this didn’t seem to affect the results significantly.  While the Labor Department didn’t note any sequester-related or side effects, it will remain to be seen if this indeed played a role, or if the claims were a normal cyclical event.  The moving average for the past several weeks remains low, which is the important figure to watch.  Continuing claims for the Mar. 16 week came in at 3,050k, which was a bit higher than the 3,041k expected.

Market Notes

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2012

0.05

0.25

0.72

1.78

2.95

3/22/2013

0.07

0.26

0.80

1.93

3.13

3/29/2013

0.07

0.25

0.77

1.87

3.10

Markets were closed for the Good Friday holiday, so the highlight of the four-day week was the S&P 500 finally reaching its new all-time level, as the Dow already did.  Defensive sectors health care and utilities led from a performance standpoint, while materials and technology lagged.

Foreign equities were led by emerging markets last week, including strong performances from Mexico, Turkey, South Korea and Malaysia—the group of emerging nations right behind the BRICs.  The worst weeks were experienced by the European periphery (Greece, Spain and Italy) in line with continued Cypriot fallout concerns.

In fixed income, a slight fall in longer term interest rates was positive for bond returns, notably for 10-20 year Treasuries as investors continued to seek out a bit of safety.  However, investment-grade corporates and other credit, as well as munis and mortgages also gained.  The worst most bonds ended up on the week was flat—including results for most foreign debt indexes.  The dollar was generally higher on ‘safe haven’ flows.

Real estate performance was led by developed Asia, with U.S. mortgage and residential right behind.  European REITs, in line with other equities, represented the only negative asset class group on the week.

In the world of commodities, the composite crude oil index gained 3% on the week, leading all segments.  The bulk of other commodities lost ground, including (from worst to best performing) grains, industrial metals and precious metals.  The poor results from grains was related to the USDA report stating that leftover corn reserves were much higher than previously though, raising supply estimates, coupled with feed usage also decreasing—in line with the higher prices as of late.

As we can see from the stats above, the first quarter was quite productive for risk assets—stock returns have provided a year’s worth of gains in the first three months.  Are stocks ahead of themselves?  Sure, from a technical standpoint, that is always the question people start asking after a strong run.  A pullback or ‘consolidation’ wouldn’t be unusual and is to be expected at some point.  However, valuations remain attractive, which could temper such a consolidation.

From a dividend discount model standpoint, large-cap stocks look to be about 10-15% undervalued, while foreign stocks appear a bit more so.  From a top-down P/E ratio view, valuations are right approximately near the level of their long-term average, but considering the low and stimulative level of interest rates, we’re a little cheap here also.  Thirdly, potential risk asset ‘real’ returns look attractive, when compared to alternatives in other asset classes (bonds, primarily, where the ‘real’ return component is a fraction of the long-term average—and barely existent).  We also have the ‘self-fulfilling prophecy’ impact, which is the reaction of retail investors to buy stocks after they start to perform well.  This is perhaps behind the persistence of the so-called momentum effect that can keep rising markets moving even higher for extended periods. Have a great week!