Economic Notes – March 17, 2014


Written by: Jon McGraw

Last weeks reports saw U.S. retail sales growth was up slightly, but one of the better performances since the fall of last year. It continues to appear that a ‘weather’ effect has taken place, but perhaps lessened in recent weeks.  Concerns over the Ukraine/Russia conflict continue, and held back market sentiment over the week as bonds outperformed stocks. Additionally, slower growth numbers from China didn’t help the pessimistic undertone and added to commodity volatility.

(0) Retail sales numbers for February came in similar to expected, gaining +0.3% relative to consensus estimates calling for a +0.2% increase (and the first positive reading since November). The core component of the report also rose +0.3% compared to an expected +0.2%. However, January and December core retail sales were revised downward by -0.2% to -0.3%, which cast more of a negative tone to the neutral result. For February specifically, sporting goods and non-store retailers (we can just call this ‘online retail’ for simplicity’s sake, as that’s what it is mostly comprised of) led with gains of a few percentage points and rebounded from January. All-in-all, considering the revisions, the overall report was neutral—neither terrible nor outstanding. In related news, same-store sales, per Johnson/Redbook, rose 2.5% on a year-over-year basis with consumer traffic increasing.

(-) Import prices gained +0.9% in February, which surpassed the expected +0.5% figure. Much of this was the result of a +4% gain in petroleum prices during the month (a major factor in this series), while other segments, such as autos and capital goods were generally flat, which provided a better indicator of core conditions. Prices over the past twelve months are down -1.1% on the headline level and -0.6% ex-fuel, which is obviously the opposite of an inflationary issue.

(0) The February producer price index came in weaker than expected, falling -0.1% compared to an anticipated increase of +0.2%. Core PPI, excluding food and energy, fell -0.2% relative to an expected +0.1% increase. The primary downward driver was from the trade services group—an indirect measure of wholesaler/retailer margins—which fell by -1%. Notably, this was centered on the apparel margins area, which may or may not have been weather-related (we would assume it was). Over the past twelve months, headline and core have increased +0.9% and +1.1%, respectively, which is below CPI and is an obvious indicator of low inflationary influences in the producer process.

(0) Total business inventories for January rose +0.4%, on par with expectations, and December growth was revised upward by tenth to an equivalent amount. The more sporadic segments of autos and drugs both gained over +2% and contributed to the largest gains.

(-) The NFIB small business optimism survey for February came in at 91.4, which was a drop from the prior month’s 94.1 and underwhelmed the consensus estimate of 93.8. Expectations for real sales, economic improvement and plans to boost employment were all down by several points. Then again, bad weather may have played a role in this, but we’ll have to see next month’s report to confirm.

(-) The Univ. of Michigan sentiment survey for March fell to 79.9 from February’s 81.6 and underperformed the forecast of 82.0. Consumer assessments of current conditions rose a bit, while future expectations worsened. Inflation expectations for the near and longer-term were generally unchanged from a few tenths hovering around the 3% level.

(-) The government JOLTS report for January showed 3,974k job openings, which underperformed the expected 4,015k. The hiring rate was an unchanged and generally low-for-the-business-cycle 3.3%. The layoff/discharge rate rose a tick to 1.3%. and quit rate fell a tenth to 1.7%—both of which being in the opposite direction of desired.

(+) Initial jobless claims for the Mar. 8 ending week fell 9k to 315k, better than the estimate of 330k. Continuing claims for the Mar. 1 week also fell to 2,855k from 2,903k the prior week and expected result this week. It appears winter-type disruptions are minimizing.

Market Notes

U.S. stocks bounced around early in the week before falling late, experiencing a down week due to events largely outside of the U.S.—signs of weaker economic growth in China and a continuation of troubles in the region of Crimea, where a vote to secede from Ukraine and join Russia was scheduled for Saturday (result being one in Russia’s favor, albeit without any residual violence, which boded well for markets today).

Foreign stocks were largely negative as well, with Europe and the U.K. down just over -3.5% and Japan down over -5% on a stronger yen. In fact, Japanese stocks are down an emerging market-like -9% year-to-date as investors have become increasingly concerned about the ongoing effectiveness of ‘Abenomics’ stimulus policies. In other markets, unsurprisingly, both China and Russia fell by over -5%, and nations in their neighborhoods fared almost as poorly.

In China’s case, exports showed a decline of nearly -20%, which alarmed investors. Additionally, a smaller solar firm was ‘allowed’ to default on a debt interest payment to investors—the first public default of its kind (albeit only $160 million worth) but spurred fears that additional firms could be on track for similar trouble. Speculation persisted that the POC would further lower bank reserve ratios to keep financial conditions eased.

Bonds shined in a risk-off week, with long treasuries gaining over a percent or more, and leading the way, followed by investment-grade credit. Laggards on the week were high yield and emerging market debt, with negative returns as spreads widened on global concerns.

REITs were led by the mortgage REIT sector, due to falling interest rates, and U.S. retail, while real estate in Europe and Asia were sharply negative by several percentage points.

Commodities were generally lower and highlighted by a sharp drop in copper on Wednesday, which ended up affecting stock market sentiment as well. ‘Dr. Copper’ has traditionally been seen as a leading economic indicator, and, in this case, the metal has been used as collateral for Chinese corporate loans (especially for utility companies), but this use has been decreasing—leading to lower demand patterns. Oil prices were also affected—falling 3-4% on the week. Conversely, nickel gained on analyst estimates for higher prices, somewhat related to the Indonesian export ban. Gold and silver also gained on the week, which was related to the ‘risk-off’ environment and Ukrainian concerns.

Have a great week!