Economic Notes – April 15, 2013


Written by: Jon McGraw

(-) Retail sales for March came in weaker than expected, down -0.4% on a ‘headline’ level as opposed to consensus expectations of a flat reading.  The biggest impacts resulted from a -0.6% drop in auto sales and a -2.2% drop in gasoline sales (is that really bad news?).  Removing auto sales from the equation didn’t change much, with the same -0.4% on identical flat expectations.  The ‘core’/control component experienced a different result, but same magnitude, falling -0.2% versus a forecasted gain of +0.2%.  The latter piece, which excludes several items that tend to be more volatile (such as the auto, gasoline and building materials components) also saw weaker numbers from more stable demand areas such as electronics, department stores and sporting goods, although personal care also dropped a bit.  Why did this happen?  Perhaps some seasonal adjustments, a dose of bad weather and an especially early Easter holiday may have played a role.  These seem small, but it’s things like this that can alter the numbers by as much as a few tenths of a percent—especially in heavily-populated areas where shoppers are concentrated.

(0) Inventory results were mixed for February.  Business inventories rose +0.1%, which lagged the forecasted +0.4% level.  Retail inventories were the primary driver, while auto parts also rose; the ex-auto retail measure, however, was up a bit more, at +0.4%.   Wholesale inventories, by contrast, fell -0.3% month-over month as opposed to an expected +0.5% gain.  Non-durable goods were the catalyst.

(+) The Producer Price Index fell -0.6% in March, which exceeded expectations for a -0.2% drop.  The bulk of this was the result of lower gasoline prices during the month (a drop of -7%, similar to results in retail sales noted above).  The core PPI, which excludes energy and food, rose +0.2% on par with forecast.  Core finished goods PPI rose +0.2%, in line with expected, as did core intermediate prices—these two categories are tracked separately as a way to note changes in input costs along the manufacturing food chain.

(0) Import prices fell -0.5% for March, which was right on target with forecast.  The biggest decline was in petroleum, which fell -2%, but is volatile month-to-month anyway.  Auto parts and consumer goods also fell.  Overall, this just lends more of a backdrop to tempered inflation pressures, as affected from imported items.

(0) The NFIB small business optimism index fell from 90.8 in February to 89.5 in March, which was largely in line with expectations (which were 89.8, technically).  In terms of underlying detail, employers planning to hire additional employees moved from a small positive to neutral on the month, and expectations for sales also dropped off.  All-in-all, monthly changes are fairly noisy, but the general trend of sentiment from business owners ‘expecting the economy to improve’ remained close to -30% (where it has been for some time).  Pessimism continues to reign.  On the other hand, 25% of owners expected to increase capital spending in their own firms.  This isn’t entirely surprising, and is actually a bit of a positive story.  While they’ve been seeing their own conditions improve on a micro level (since the 2008 period), many remain discouraged by macro government and political developments that they feel increasingly disconnected with.  This isn’t unusual.  However, if enough ‘micro’ forces improve, it may eventually outweigh the sentiment regarding the ‘macro’—these shifts tend to happen without anyone realizing it until they’ve already occurred.

(-) The University of Michigan consumer sentiment measure dropped in April, to 72.3, versus an expectation of 78.6.  This is the lowest level in nine months, and is the product of deterioration in consumer opinions of both current conditions and future expectations.  The administrators of the survey noted that government policies were the primary catalyst for pessimism.  However, consumers’ own buying plans for household goods were positive (interestingly, this mirrors the micro- vs. macro- effects seen in the small business surveys noted above).

(+/-) The FOMC minutes for the March meeting were released, and added a bit of clarity to recent policy.  Before the recent slowdown in several economic measures, it appeared the group may have been leaning toward tapering off purchases toward the end of this year (labor market depending).  However, it appears this timeline may be pushed out a bit further than this, into 2014.  Again, there is continuing debate regarding the benefits and costs of such easing as it continues and such activity may have lesser and lesser impact on the margin.

(+) Initial jobless claims for the Apr. 6 week dropped more than expected, to 346k, relative to the forecasted figure of 360k and reversed the previous week’s rise.  According to the Labor Department, reversal of some seasonal changes accounted for a bit of this (which explains the week-to-week volatility lately), including ‘spring break’ timing effects.  The biggest job losses were in transportation, education service and food service, which seem to coincide with this spring break theme.  The four-week moving average rose to 358k.  Continuing claims for the Mar. 30 week came in at 3,079k, which was a bit lower than the 3,067k expected.

(+/0) The government’s February JOLTS report, which lags the payroll report by a month, showed a strong increase in job openings (3,925k versus a forecasted 3,740k) and rate of hiring (3.2% to 3.3%).  Other ‘job separation’ metrics, such as firings/quits/retirements didn’t change.  The interesting part about the ‘quit’ rate is that an increase can signify more worker confidence in the economy and employment prospects—in fact, FOMC officials have commented on this measure in that way.

Market Notes

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Equities experienced a solid week despite some lackluster economic numbers; however, the Fed’s apparent commitment, as interpreted through the minutes, in keeping the gas pedal depressed helped sentiment.  All industries made money last week:  telecom and consumer discretionary led the way, while energy and materials earned the most meager returns.

Earnings season began this last week for the 1st quarter and results thus far have been mixed.  From an earnings standpoint, a few notable early releases, such as JPMorgan and Wells Fargo, resulted in revenue disappointments but earnings surprises—so investors were somewhat happy with that.  Oracle and FedEx, disappointed, however.

Interestingly, some investors gauge the early portion of the earnings season by the S&P’s traditional first reporter—Alcoa.  However, over the past 5 years, it has been shown that Alcoa results have demonstrated little predictive value for the rest of the market.  Overall, results for Q1 are expected to be relatively flat—perhaps in a range of -2% to +2% of growth.  Energy and technology look to be in the worst positions as far as growth prospects are concerned, while utilities, financials and consumer discretionary may see growth up to several percent.  As you might interpret from this, earnings results are much more stock-specific this quarter than they have been in prior quarters.

In looking at overall expectations for 2013 as a whole, the 2nd quarter looks a little better (growth in the mid- to higher single digits), and solid double-digit earnings gains for the 3rd and 4th quarters. Based on current estimates, this leaves full-year expectations in the 10-15% range for earnings growth.

Developed foreign equities were the most productive asset class of the week, led by returns in Spain and Italy in Europe (although Greece was actually the best-performing index), as well as Japan in the Pacific region.  Investors continue to reward Japanese markets for the central bank’s plan to boost inflation in the economy by purchasing assets of various types—not only government bonds, as the U.S. Federal Reserve is focused on, but also stocks.  This has led to a bit of a rally in Japan equities as well as a severe drop in the Yen.  On the underperforming side, South Korea suffered with continued tensions in the area, as did Russia (a market that often responds in line with commodity prices).

Bonds experienced a generally lackluster week as investors moved funds into equities (an increasing trend this year), and rising rates.  High yield was one of the better performers, with investment-grade corporates not too far behind, in the U.S. markets.  The big losers on the week were longer-term Treasuries.  Emerging market debt also gained on the week about a percent.

Commodities were generally down several percentage points on the week.  Natural gas and wheat gained on the week, while crude oil, gasoline and corn all fell dramatically (corn due to favorable weather so far in the U.S. during planting season).  Overall, equity strength has weighed on alternative assets like gold—which has really fallen off from highs.  According to the International Energy Agency, crude oil demand is expected to decline for the third consecutive year due to more tempered global economic growth prospects; headline-worthy news like this tends to cause a swift downward reaction in energy prices. Watch for additional possible declines in commodities.

Have a great week!