Archive for category: Investing

Last Week

Economic data last week importantly confirmed that the weakness we saw in December/January was weather-related and temporary. The decent March PMIs and jobs report likely put to bed any major concerns about the U.S. economy losing steam.  But, given the trend of February data, last week’s data merely confirmed what was widely assumed, so that’s why we didn’t see the markets react in a more positive fashion.

Internationally, it was a different story, though. The Chinese March PMIs (both manufacturing and service) weren’t as bad as feared, and helped (for now) alleviate some worries about the pace of growth in China.  Importantly, the official March manufacturing PMI held above 50 (50.3), while service sector PMI actually beat estimates (51. 9 vs (E) 51.0).

In Europe, the ECB meeting was the big event last week, as Mario Draghi did a good job convincing markets that QE in the EU is a real possibility. That potential ECB easing, combined with March PMIs that showed continued improvement in the EU economy, helped upgrade the outlook in Europe.

Both international markets reacted positively to the better-than-feared/-expected news, and resulted in decent outperformance of international vs. U.S. last week.

The big number domestically was Friday’s jobs report, which obviously is getting a lot of attention given the Friday sell-off.  First, the jobs number was fine.  It was a slight miss vs expectations and the “whisper number” (192K vs. (E) 206K and whisper of 200K-ish).  But, there were positive revisions of more than 30K to Jan/Feb. Most importantly, the jobs numbers confirmed that the dip in economic activity in Dec/Jan was mostly weather-related, and that 3% annual GDP growth in 2014 is still a reasonable expectation.

The one thing the market didn’t like about the jobs report, though, was the salary/wage data.  Average hourly earnings declined by 0.01 to $24.30, while year-over-year wages grew just 2.1% vs. (E) 2.3%.

That’s important for two reasons.  First, higher wages obviously reflect more economic activity. That’s because, as firms get busier and the demand for employees goes up, the “cost” of those employees (or what you have to pay them) goes up as well because the entire industry sees more activity.  Those employees, who are making more money, then go spend it in the economy, creating a virtuous cycle.

Second, we currently have very low inflation (statistically) here in the U.S., and as a result dis-inflation/deflation remains a threat (although not nearly as big of a threat as in Europe). But, it’s in everyone’s interest to see inflation rise from its current levels, as it would be a positive for the economy.  But, without wages increasing, it’s very unlikely that we’ll see inflation start to move higher in the immediate term.

The stagnation in wages is something to watch, but it didn’t “cause” Friday’s sell-off, and I think this is more of a situation where the analysts were looking for an excuse for the “dovish” response to the number. During the coming months, if we start to see a trend of further stagnation in wages, then it may be a legitimate problem, but one number doesn’t make a trend.

So, bottom line is the jobs number and economic data were “fine” last week, and largely the economy is performing as expected (slowly improving growth).

This Week

It’s a quiet week on the data front, with the most important data coming from China.  Trade balance data comes Wednesday night and CPI/PPI come Thursday night, and while inflation isn’t the threat it once was in China, it’s still important that inflation stays contained, as the entire market expects Chinese authorities and the PBOC to remain supportive of growth.  If inflation runs too hot, they may not be willing to be as accommodative as the market currently expects, so the risks into the number (while small) are to the downside.

Domestically there’s not a lot on the calendar.  FOMC minutes from the March meeting are released Wednesday, but they shouldn’t contain any surprises given the March meeting was one with the Chair’s press conference.  Analysts will look into the minutes for “hawkish” or “dovish” leanings, but Fed policy expectations remain pretty well- known—they are going to continue tapering QE at $10 billion per meeting, and the first rate hikes will come in mid-2015 (April to July).  And, only a material change in the economic outlook will change that policy expectation.

Weekly claims will also be watched to see if the downtrend in the four-week moving average will resume (and, in doing so, imply incremental improvement in the labor market).

In Europe it’s also quiet, as the Bank of England policy meeting (Thursday) is the highlight, and there’s no change expected to policy (it should be a relative non-event). Bottom line is this is a quiet week and shouldn’t alter anyone’s outlook on the global or U.S. growth.

 

Link to the story here.

Last Week The domestic economic calendar was very sparse last week, as most of the market’s focus was on Chinese data. Starting with the U.S., though, the two U.S. reports last week were retail sales and weekly jobless claims.  Both slightly beat estimates (retail sales rose 0.3% vs. 0.2% and weekly jobless claims were 315K vs. 330K), but neither report really changes anyone’s outlook for the economy or Fed policy. The most “important” economic data last week came from China, as the country reported its trade balance, retail sales, fixed-asset investment and industrial production last Thursday. All of the report missed estimates, raising concerns that the Chinese economy is seeing growth further slow (multiple firms reduced their Chinese GDP forecasts to between 7.0% and 7.5%). Read More

Last Week

Economic data last week broadly met or exceeded expectations, and 1) Solidified that the global economic recovery is ongoing, 2)Strongly implied the economic weakness in the U.S. in Dec/Jan is temporary, and 3)Ensured the Fed will continue to taper the QE program by another $10 billion at the March meeting a week from Wednesday.

From a practical investment standpoint, the last week’s data reinforces that the global economic backdrop remains a general tailwind on equities, although there certainly are risks to monitor.

Starting with the jobs number, we all know by now that it was a surprisingly strong report, at 175K jobs added in Feb. vs (E) of 150K and “whisper numbers” of around 130K-ish.  And, in addition to the positive February data, there were positive revisions of 37K jobs added in December and January (11K and 26K, respectively).

Looking a bit deeper into the number, while the headline was a strong beat, the details of the jobs number weren’t quite as good.  Specifically, critics are pointing to the fact that the average workweek fell from 34.3 to 34.2 hours, missing estimates and falling for the second-straight month.  That’s somewhat important because the average workweek is a leading indicator for employment. (As employers get busier, they work their current employees more before hiring additional staff, so an uptick in average workweek usually precedes increased hiring.)

I’ll let the economists debate the minutiae and validity of the report, but the bottom line from a market standpoint is this:  The jobs report was a positive because the weakness in hiring in December and January stopped and the “weather excuse” appears more valid, and, combined with other data, it shows the slowdown in the U.S. economy so far this year isn’t gaining momentum and appears, for now, to be temporary.

The other big reports out last week were the ISM manufacturing and non-manufacturing (services) PMIs.  And, the results were, on balance, positive.

ISM manufacturing rebounded from that big drop in January, bouncing to 53.2 vs (E) 51.9.  ISM non-manufacturing, though, dropped to 51.9 vs. (E) 53.5, and the employment sub-index fell to 47.5, the first sub-50 reading for that number in over two years, although that sub-index was obviously overshadowed by the government report.

Internationally, data was also supportive.  China remains the No. 1 “macroeconomic” risk to the global recovery, but last week the data largely met expectations and, while the Chinese economy is slowing, so far it appears to be slowing about as everyone expected (which is “OK” as that won’t de-rail the global recovery).

Indeed, much to the despair of the China bears, China remains a crisis that hasn’t materialized.  Manufacturing and composite PMIs met expectations and importantly stayed above the 50 level.  And, although there was a disappointing trade balance report out Friday night (exports plunged), a lot of that was because exports were “pulled forward” by the Chinese New Year, so that soft data point will get a “pass” of sorts.

Europe was actually the area with the best data last week, as manufacturing and composite PMIs beat, as did EU retail sales.  This in part led the ECB to make no changes to policy, and to strongly imply that the ECB was “on hold” for the foreseeable future (which is very positive for European bonds, and I continue to think PIIGS’ bonds remain some of the most-attractive options in the bond markets today.)

Bottom line is that, while you can argue that the economic data last week had its gives and takes (there are legitimate points for the bears to remain bearish), it did help positively resolve the question of “is the global and domestic recovery faltering?”) with a pretty definitive “no.”

Bottom line from last week is this:  Economic data remains broadly supportive of stock prices, and if this rally is going to break in the near future, it won’t be because of economic growth concerns.

This Week

After an exhausting week of data last week, we all get a rest this week.  The calendar is very light domestically, with retail sales and jobless claims (both Thursday) the only reports to watch.

Internationally it’s almost equally quiet, although we do get some Chinese data Thursday morning (industrial production and retail sales).  Given the ongoing concern about China, the data will be watched, but even if it “misses” I don’t think it’ll materially change people’s outlook on China. (The expectation remains for between 7.0% and 7.5% GDP growth.)