Economic Notes – March 31, 2014


Written by: Jon McGraw

Economic data remained mixed, but some of the winter effects of the past few months appear to be dissipating. An important test in coming weeks/months will be how the much more extreme-than-average winter normalizes and if economic data can similarly regain better traction. Although tensions internationally seem to have cooled to a simmer, investors are continuing to monitor the Ukraine/Russia situation closely, as an unexpected development here is sure to rattle markets. In the meantime, upcoming corporate earnings may provide enough excitement for the time being.

(0/-) Durable goods orders for February came in up +2.2%, which surpassed the expected +0.8% increase; however, a few numbers were revised down by half for January (to a gain of +0.8%). However, core orders fell -1.3%, compared to a consensus gain of +0.5%. The difference between the two was explained by gains of +14% in civilian aircraft and +4% in autos, while other items were generally weaker. Core shipments also were a bit weaker than expected, rising +0.5% relative to a forecast of +0.8%.

(-) The preliminary Markit PMI for March came in a point lower than expected, at 55.5, and a 1.6 point drop from last month’s final number. In the underlying data, output and employment fell by a fraction of a point, while new orders fell by over a point. We list this index due to its limited use in estimating economic conditions and the ISM manufacturing report.

(-) The February government personal income and outlays report was a bit weaker than anticipated. Personal income rose +0.3%, which was on par with expectations, and a tenth of which included transfer income components from Affordable Care Act. Personal spending also rose +0.3% for the month, on par with expected, but January’s spending was pared back a few tenths (cut in half, essentially) via the revision. Utilities spending remained high, due to winter weather, which isn’t surprising, and that seems to have affected spending in other areas (perhaps both the higher utility bills and inability to leave the house). Both core and headline PCE index numbers rose +0.1%, and +0.9%/+1.1% over the past year, respectively, so inflation carry-through is tempered here as well.

(+) The 20-city Case-Shiller home price index for January came in with a gain of +0.8%, surpassing expectations by two-tenths of a percent. The largest gains happened in California: San Diego and San Francisco rising nearly +2% each. For the full year, the index has gained +13.2%, which is considered to be a strong year.

(-) The FHFA house price index for January rose +0.5%, falling short of expectations by a tenth of a percent, while December’s gain was revised downward by a tenth at the same time. Price movement in this index was strongest in the Middle Atlantic, New England and upper Midwest areas, which all gained over a percent on the month. On a national level, the index rose +7.4% for the full year—this index differs from others in that data is based on repeat single-family property transactions using loans bought/securitized by Fannie Mae/Freddie Mac, so more specific than other price indexes but also offers broader geographic coverage beyond the 20 cities in the Case-Shiller.

(-) Pending home sales for February came in slightly lower than expected, falling -0.8% compared an anticipated +0.2% gain. In addition, January pending sales were revised down two-tenths of a percent to a flat result for that month. Regionally, sales in the South and Northeast were down several percent, while the Midwest and West gained over 2%. This represents the 8th straight month of falling pending home sales, which obviously is far further than the recent winter weather effects. However, the debate now is how much of the sales activity and inventory drawdown is due to lessened investor activity relative to purchases by homeowners.

(+) New home sales for February fell -3.3%, which was better than consensus expectations calling for a -4.9% decline; however, January sales were revised downward a bit. The net result is flat growth for sales over the past year, which continues to point to a challenging environment but also points to potential for additional growth in years ahead since we continue to be below-trend in homes being built versus what’s needed to keep up with demographic demand. From a historical perspective, new home sales for the past few decades have averaged about 20% of existing home sales; right now, they’re at about 10%.

(0) The final release of the March University of Michigan sentiment index ticked up a tenth from the first version, at 80.0. Compared to last month, consumer feelings about current conditions worsened a bit, while future expectations improved slightly.

(+) The Conference Board consumer confidence survey for March rose four points to 82.3, which surpassed the 78.5 expected reading and represents a post-recession high for the index. Consumer assessments of the present situation fell a bit, while future expectations improved by several points. The question regarding jobs being ‘plentiful’ versus ‘hard to get’ fell by a point and remained in negative -20 territory.

(+) Initial jobless claims for the Mar. 22 ending week fell by 10k to 311k, which was a good deal lower than consensus estimates calling for 323k. Continuing claims for the Mar. 15 week also fell to 2,823k, which were lower than the expected 2,882k. There appeared to be no exogenous factors or estimated claims figures, which added to the increased normalcy of the report, and the trend lower on both measures is a positive.

Lastly, the third and final revised GDP calculation for the 4th quarter 2013 ticked upward a few notches from 2.4% to 2.6%. Personal consumption expenditures added 0.5% to the final figure—all of which originated from services spending (health care, specifically). On the offsetting side, business investment fell -0.3% which was spread between inventories, intellectual property and non-residential building. Estimates for 1st quarter 2014 GDP currently range from 1.5% on the lower end to 3.0% on the more optimistic side, but we have a month to find out the final result and how much winter impact is embedded.

Market Notes

U.S. stocks were mixed during the week, with large-cap outperforming smaller-caps by the widest margin in some time. From a sector perspective, energy and utilities stocks gained a few percent while consumer discretionary, financials and materials lagged over a percent. In particular, more speculative names in biotech and social media have experienced difficult weeks as of late. Facebook announced a $2 billion acquisition of a virtual-reality goggle manufacturer, which caused some investors to scratch their heads due to the lack of a proven product. Along the same lines, the Russell 2000 is currently trading at one of the larger valuation premiums over the S&P in many years (approaching 25%), which reaffirms our underweight to the asset.

In developed markets, Japanese stocks gained +4%, followed by Europe and the U.K. with smaller positives (still outgaining U.S. stocks). Emerging market stocks were the best performing assets of the week, with a recovery in Turkey, Brazil, South Africa and India—the problem children of recent months. Most recently there does seem to be a bit of a shift in flows away from more speculative U.S. issues into better-valued foreign equities, such as emerging markets, although such flows can be finicky and fast-changing.

Bonds experienced a moderately positive week, with long governments and investment-grade corporate credit leading the way, and high yield bonds just behind. Emerging market bonds performed even better than that, while developed market debt performed in line with U.S. bonds.

Real estate was led by a recovery in Asian REITs, up nearly 3%, with European REITs just behind and U.S. REIT categories roughly flat on the week. Mortgage REITs were the worst-performing segment, losing over a percent.

Commodities were generally higher on the week, led by continued gains in coffee and sugar (the former up over 50% YTD already), as well as natural gas, copper and crude oil… so seemed the majority of the closely-watched contracts gained, with the exception of gold, which lost -3% as risk-off sentiment eased.

Have a great week!