Economic Notes – February 18, 2014


Written by: Jon McGraw

(-) Retail sales for January came in a bit underwhelming, down -0.4% on the month, versus an expected flat reading. Additionally, December sales were revised down from +0.7% to +0.3%, which cast a negative tone on the report. The ‘core’ part of the January series (which is used in government GDP assumptions, so arguably more important) was down a similar -0.3%, which also underperformed the forecast—calling for +0.2%. This report was also blamed on bad weather, since nothing like snow/ice does as good of a job in keeping people from getting out to buy things. This was seen in the details of the data, which showed weakness in auto sales (-2.1%), department stores and sporting goods (each down about -1.5%) as well as restaurants/bars (declined about half a percent). At the same time, though, online retail showed some weakness, and was also down a half-percent, albeit better than the brick-and-mortar variety. The sole positive numbers came from building materials and gas stations, which gained over a percent. While the report and prior month revision were disappointing, it is difficult to say how much of the negativity is weather-related. Stock market participants watch retail sales quite closely, so February’s report (assuming weather isn’t a factor again, which it might be) will perhaps carry additional weight. Month-to-month retail results can be volatile; it’s the multi-month trend that is most important.

(0) Wholesale inventories for December rose +0.3%, which fell short of the +0.5% forecast. Durable goods inventories rose +1.3%, which was offset by non-durables, which fell -1.3%. Inventory growth is relevant as it relates to GDP contribution. Business inventories for December rose +0.5%, which was slightly higher than the +0.4% expected. This broader measure includes manufacturing, wholesale and retail inventories, the latter of which increased the most over the month (due to auto inventories rising +1.3%).

(-) Industrial production fell more than expected for January, down -0.3%, compared to expectations of a +0.2% gain. The manufacturing production component of this fell -0.8%, which was also a disappointment relative to an expected slight +0.1% gain. The Fed noted that ‘severe weather’ took a toll on national production, so another winter issue perhaps, as has been the case throughout the reporting season. Auto production fell -5%, which had a strong effect on the overall report, but other areas on net were also poor with the exception of utilities, which gained +4%, as they often do when cold weather hits. Capacity utilization was far lower than the anticipated 79.3%, coming in at 78.5%.

(0) Import prices for January rose +0.1%, compared to an expected -0.1% decline. Since petroleum imports fell a percentage point and auto prices fell a marginal amount, the difference originated from higher prices in consumer and capital goods. On a rolling 12-month basis, prices have fallen -1.5%, which again shows a lack of imported inflation. Imported goods prices from the Middle East (mostly oil) fell -6%, which is exactly what the pro-fracking political contingent likes to see.

(0/+) The Univ. of Michigan consumer sentiment survey for February came in at 81.2, which was unchanged from January but one point higher than expected. Consumer assessments of current conditions deteriorated a bit, while expectations for the future improved by a few points. Inflation expectations for the coming year rose a few tenths to 3.3% interestingly, while the longer term 5-10 year guesses remained just below the long-term average at 2.9%.

(+) The NFIB small business optimism survey didn’t change much from December’s 93.9 to 94.1 for January, but still remained better than consensus that called for an unchanged reading. Expectations for higher real sales and plans to boost employment moved upward several points; however, earnings trends lost ground. In terms of inventories, conditions looked relatively normal, and relatively not that different from neutral, so no excesses apparent. The measure overall remains strong for this cycle, but weaker compared to prior cycles.

(0) The JOLTs job openings report for December came in at 3,990k, which surprised on the upside, relative to expectations calling for 3,980k, but was still lower than the 4,033k revised November number. The details behind the headline were also a bit weaker, as the hiring rate fell a tenth to 3.2% and the layoff/discharge rate rose a tenth to 1.2%. The quit rate fell a tenth as well, to 1.7%, the latter measure being one closely watched as a proxy for job market confidence.

(-) Initial jobless claims for the Feb. 8 ending week rose by 8k over the prior week to 339k, which was slightly above the expected 330k. Continuing claims for the Feb. 1 week fell by 18k or so to 2,953k, which was lower than the 2,964k expected. These continue to be somewhat lackluster, albeit likely affected by year-end activity and perhaps weather carryover.

Lastly, Janet Yellen gave her inaugural monetary policy testimony to Congress last week. Everything generally went as expected. Unsurprisingly, some analysts/economists look fairly deeply into the words spoken at these meetings in an effort to gauge some additional meaning. One view we encountered used text mining to generate ‘word clouds’ (which takes the most common words used and highlights/bolds/enlarges them based on frequency of use, or vice versa, onto a graphical grid—we’re sure you’ve seen this done before on the national news or after political speeches). Bernanke’s communications had most often referenced ‘financial,’ ‘purchases’ (i.e. QE) and ‘inflation’ (the latter being his academic focus), while Yellen’s comments last week highlighted ‘economy,’ ‘banks’ and ‘jobs’ (the latter being her academic focus). In short, markets were soothed by the consistent message carried over from the prior leadership, but the underlying niche focus of each chairperson seems to ultimately seep out in their language. This may mean absolutely nothing in terms of policy, or it could indicate a subtle push, as much of her commentary was centered on continued labor market slack.

Market Notes

Equity markets in the U.S. were higher on the week, as the consistency of Janet Yellen’s testimony which buoyed continued easing hopes, as well as some debt ceiling resolution (extending borrowing authority at least another year). Also, the Affordable Care Act mandates for employers of between 51-100 workers to provide health insurance was delayed until 2016. From a sector standpoint, utilities and health care outperformed, while financials and consumer discretionary lagged, albeit with still-sharply positive returns. Sentiment continues to be quite stock-specific, with earnings beats plugging away higher, while misses or adjustments in forward-looking prospects are being punished. Last week, issues like Campbell’s Soup gained +5% on such sentiment, which is significant for a ‘boring’ consumer staples firm.

Internationally, there was less news on the emerging markets front last week compared to those prior. Developed market equities in Europe and the U.K. gained nearly 3%, but the index was brought down by a half-percent loss in Japan, as the Japanese current account deficit widened to a record level and raised chances of additional downward pressure on the yen. Emerging market returns were led by strong recovery showings in Argentina, Chile, Indonesia and China, but were held back by negative returns in Brazil and India. China’s trade surplus grew by $6 billion for January, led by strong growth in both exports and imports, and was sharply higher than expected.

Bonds were mixed last week, as the strength in risk markets and yields ticked higher in the middle of the curve especially, although the front end moved lower. The best-performing fixed income assets were high yield and investment grade corporates, while expectedly, long Treasuries and TIPs lagged. Foreign developed market bonds were higher by a half-percent generally, on the weaker dollar, while emerging market debt was slightly negative.

Commodities were generally higher on the week, with a slightly weaker dollar. Natural gas trading continued to be volatile and erratic, with +/- 5-10% price swings on an almost daily basis, but was up +5% on the week. Much of the volatility is a continued battle between weather forecasts and perception of stored inventories on hand prior to supplies being needed. Silver and gold also gained sharply on weaker economic data, which precious metals hoped would threaten the current pace of the Fed’s QE easing, but may have also included some value-hunting perhaps. Coffee and other soft commodities were also higher on continued overly dry weather in South America, which could threaten crop supplies. Economically important copper and oil were generally up slightly on a net basis.

Have a great week!

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.