Economic Notes – April 28, 2014

April
28

Written by: Jon McGraw

  • U.S. economic data – including manufacturing, new orders for durable goods, and consumer confidence – were strong, exceeding consensus expectation.
  • Housing sales and initial jobless claims came in weaker than consensus expectation.
  • Conflict between Russia and Ukraine weighed on the market. Investors hid in safe-haven assets such as long-term government bonds and defensive stocks.

(+) The February House Price Index (HPI) published by Federal Housing Finance Agency (FHFA) increased 0.6% from January, exceeding the median forecast of 0.5%. The HPI has been resilient despite severe winter weather for the year to date. The index level roughly equates to the index level of June 2005, but still 7.6% below its April 2007 peak. Comparing year over year, the national house prices rose 6.9%. The Pacific region’s price was up the most by 14.3%, while New England house prices improved the least by six-tenths of a percentage for the last year.

(-) Existing-home sales in March were down two-tenths of a percent to a seasonally adjusted annual rate of 4.59 million. The latest monthly decline was more modest than the consensus of -1.1%. Last month’s sales volume marked the slowest since July 2012. Regionally, existing-home sales increased in the Northeast and Midwest but fell in the South and West.

(-) Sales of new single-family houses in March fell 14.5% month-over-month to a seasonally adjusted annual rate of 384,000, significantly below the market-expected annual rate of 450,000. Compared to March of last year, new house sales declined 13.3% from 443,000. Except for the Northeast, sales were down in all three other regions. Severe weather in the first quarter may have been part of the reason for the weak spring sales season.

(+) The Markit Flash U.S. Manufacturing Purchasing Managers’ index (PMI) stood firm at 55.4 in April, on par with March’s reading of 55. The index continued to register strong value above 50, signaling the solid pace of domestic manufacturing expansion. Mainly driven by pent-up domestic demand, the index’s output, new orders, and new export orders components accelerated in April. Inventory of finished goods was built up a little bit from March’s 47.9 to April’s 49 index level.

(+) Following a 2.1% increase in February, new orders for durable goods accelerated 2.6% to $234.8 billion. Boosted by an 8.6% increase in nondefense aircraft and parts orders, the headline durable goods orders exceeded the median forecast of a 2% increase. Excluding transportation, new orders grew 2% from the prior month. Excluding defense, new orders increased 1.8%.

(-/0) Initial jobless claims for the week ending Apr. 19 increased 24,000 to 329,000 after seasonal adjustment, which was slightly worse than the 315k expected by consensus. The 4-week moving average was 316,750, up slightly from the previous week’s 312,000.

Continuing claims for the week of April 12 decreased 61,000 to a post-recession low of 2,680,000. The 4-week moving average of continuing claims reached the lowest level since Dec. 29, 2007.

(+)April’s final reading for the University of Michigan Consumer Sentiment Index revised up from the preliminary reading of 82.6. The index came in at 84.1, stronger than the consensus expected 83.0. Consumer sentiments for both current economic conditions and future expectations improved. The surveyed inflation expectation was unchanged from last month and well within the recent years’ range: 3.2% for the one-year period and 2.9% for the 5-to-10-year period.

Market Notes

Boosted by positive economic news, U.S. equity markets were trending upward in the first half of the week.  Toward the end of the week, investors’ concern on escalating tensions between Russia and Ukraine helped push the market lower.  Large cap stocks outperformed both mid cap and small cap stocks.  Defensive sectors beat cyclical sectors.  Utilities and healthcare led the market with a small positive return, while telecom and consumer cyclical lagged with a small negative return.  In general, value style outperformed growth style.

Outside the U.S., international developed stocks outperformed both U.S. and emerging market stocks.  The MSCI Europe index beat the MSCI Pacific index by 58 bps for the week.  In April, Eurozone economic expanded at the fastest pace since May 2011, and surveyed consumer confidence rose to the highest level since August 2013.

In emerging markets, the HSBC China manufacturing PMI for April continued pointing to contraction, even though the index recovered a little bit to 48.3 from 48.0 in March.  Russia’s economic situation deteriorated and is in danger of slipping into recession in the second quarter of this year.  Standard & Poor’s rating agency downgraded Russia’s credit rating to BBB-, one level above junk status with a negative outlook.

Not surprisingly, bonds outperformed stocks and returned positive.  While geopolitical risk around Ukraine does not subside, investors seek safe-haven assets.  Long-term U.S. government bonds were up more than 1%, outperforming corporate bonds.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds returned 9 bps, outperforming emerging market bonds.

Foreign REITs lost 33 bps, underperforming U.S. REITs by 51 bps in the week.  Commodity returns were up 27 bps measured by the DJ-UBS index.  The energy heavy S&P GSCI Commodity index declined 54 bps.

Have a great week!