Economic Notes – March 24, 2014


Written by: Jon McGraw

Just in time for spring break, last week’s economic data seem to suggest that the economy is bouncing back after two months’ of extreme weather.

(-/0) Empire State Manufacturing Survey in March suggested business conditions for New York manufacturers continue to improve modestly. The general business conditions index inched up to 5.61 from February’s 4.48. However, the index was slightly below a consensus-expected 6.5. The index for new orders rebounded from the prior month’s negative level to 3.13 in March, signaling that the severe weather’s negative impact is dissipating. In terms of the survey response to expectations six months ahead, the capital expenditures index improved 14 points to 16.5 from the prior month.

(+) Philadelphia Fed Business Outlook Survey Index increased to 9.0 in March, exceeding the consensus forecast of 4.0. The strong uptick in the level of general business activities reflected a strong rebound from February’s -6.3 reading, which was mainly due to weather-related weakness. Indicators of new orders, shipments, unfilled orders, and average employee workweek all turned positive. Driven by expected higher sales and the need to replace equipment, nearly 49% of the surveyed firms said they planned to boost their capital spending during the next six months.

(+) Industrial production for February rose six-tens of a percent month over month, exceeding a consensus-expected monthly increase of 0.2%. It completely reversed from January’s poor reading of -0.2% due to extreme weather. Within major market groups, consumer durables goods’ output increased by 2.1%, including a 4.6% jump from the production of automotive products. The capacity utilization rate for total industry in February was up from 78.5% in January to 78.8%. Its long-run average for the last four decades (1972 to 2013) is 80.1%, 1.3% above current total capacity utilization.

(0) The headline Consumer Price Index rose one-tenth of a percent in February compared to January. Excluding food and energy, the core CPI index also increased one-tenth of a percent as the market expected. The food index rose 0.4%, its largest monthly increase since September 2011. Meanwhile, the energy index declined 0.5% due to a decrease in the gasoline index. Over the last 12 months, the headline CPI index grew 1.1% and the core CPI index was up 1.6%. Although both measurements are still within the Fed’s 2% target, there is evidence suggesting pockets of segments experienced some inflationary pressure, such as food away from home, shelter, the index for meats, poultry, fish, and eggs, etc.

(-) Housing starts in February were at a seasonally adjusted annual rate of 907,000, a slight miss of the consensus view of 911,000. Single-family housing starts were up 0.3% from January’s annual rate of 581,000 to a rate of 583,000 in February.

(-/0) According to the National Association of Realtors, February existing-home sales were down 0.4% to a seasonally adjusted annual rate of 4.60 million from 4.62 million in January. The result was below the consensus-expected flat sales of 4.62 million. The median existing-home price increased 9.1% year over year to $189,000 for all housing types. The negative impact from the unusual cold weather continued to point to weaker existing home sales, particularly in areas heavily hit by weather. For example, existing-home sales in the Northeast fell 11.3% in February sequentially and declined 12.7% from a year ago.

(0) Initial jobless claims for the week ending March 15 came in at 320,000 after seasonal adjustment. The reading was in line with the consensus-forecasted figure. The four-week moving average was 327,000, a decrease of 3,500 from the prior week. During the comparable week in the prior year, the initial claims figure was 341,000, 6.6% worse than current initial claims.

Continuing claims for the week ending March 8 came in at 2,889,000, which was also in line with the 2,880,000 expected. The total number of people claiming benefits in all programs for the week ending March 1 was 3.35 million, which was roughly 2 million less than 5.37 million persons claiming benefits in the comparable week in 2013.

Market Notes

Last week’s FOMC meeting reaffirmed its highly accommodative stance on monetary policy, maintaining the target range of the federal funds rate between 0% and 0.25%. Meanwhile, the Committee announced another $10 billion reduction of its asset purchases from $65 billion in March to $55 billion starting in April.

After Russia officially annexed Crimea from Ukraine, Russian President Vladimir Putin disavowed any intention to break up Ukraine. Meanwhile, Ukraine moved to establish closer ties with the EU through a trade pact. Investors seemed relieved that the situation in Ukraine is stabilizing with the help from the West and international organizations. Domestic stock markets were up. Large cap stocks outperformed both mid cap and small cap stocks. Value stocks beat growth-oriented stocks. Better economic data releases boosted investors’ confidence. Economic sensitive and cyclical sectors – such as financial services, technology, and energy stocks – also outperformed. Defensive stocks such as utilities and healthcare stocks lagged.

Outside the United States, emerging market stocks outperformed developed international stocks by 67 bps. European stocks beat Pacific developed country stocks.

Fed Chair Janet Yellen mentioned the committee might hike the Fed funds rate in – “something on the order of six months” – after ending its QE3 asset purchase program. That timeline is sooner than investors expected.  As a result, with rates higher, bonds lost ground during the week. Domestic intermediate bonds underperformed both short-term and long-term bonds. Corporate bonds declined less than U.S. government bond issues. Foreign-developed sovereign bonds declined 1% measured by the Citi Non-U.S. World Government Bond index. The 10-year Treasury yield inched up 10 bps to 2.75% compared to the prior week.

Foreign REITs lost 1.15%, underperforming U.S. REITs by 108 bps in the week.

The energy heavy S&P GSCI Commodity index fell 46 bps but beat the more diversified Dow-Jones UBS Commodity index by 99 bps.

Today we are off an rolling with the first week of Spring!

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