March Economic Update

Monthly Economic Update

March 2014

THE MONTH IN BRIEF

Wall Street staged an impressive comeback in February – emerging market currency troubles, middling economic indicators and unrest brewing on multiple continents couldn’t stop the bulls from running. The Dow gained 3.97% for the month and the S&P 500, Nasdaq and Russell 2000 all gained more than 4%. Important commodities and most foreign stock exchanges also rallied. While existing home sales slipped, new home sales jumped. New Federal Reserve chair Janet Yellen soothed the markets with reassuring remarks on Capitol Hill.¹

DOMESTIC ECONOMIC HEALTH

Why were so many economic indicators so feeble? Maybe it was the weather. Janet Yellen thought so – on February 27, she told Congress that the miserable winter much of the U.S. was enduring was likely distorting economic reports for the worse. The unemployment rate fell to 6.6% in January, but hiring fell off as well with the economy generating 113,000 new jobs (payrolls had grown by an average of 182,000 positions a month during 2013). The federal government also revised its estimate of Q4 GDP down to 2.4%.^2,3

Consumer spending represented a bright spot – personal spending was up 0.4% for January and personal incomes rose 0.3%, even as overall retail sales declined 0.4%. Still, the Commerce Department revised December’s consumer spending gain down to 0.1% and the Q4 gain down to 2.4%.^4,5

Consumer prices moved north just 0.1% in January while producer prices rose 0.2%; the gains in the core CPI and PPI matched the respective headline numbers.^.6.

As for consumer sentiment … the Conference Board and University of Michigan indices told slightly different stories. Last month’s final University of Michigan index came in at 81.6, a minor improvement from the final January mark of 81.2. The Conference Board’s consumer confidence index (which arguably carries greater weight) slipped 1.3 points to 78.1 for February. The CB’s leading economic indicator index was up 0.3% in January.^.6,7.

American industrial output had fallen 0.3% in January; economists polled by Briefing.com had expected a gain of that magnitude. Durable goods orders fell 1.0% in the first month of 2014, though they advanced 1.1% in January minus transportation orders.^5,7.

The much-watched purchasing manager indices maintained by the Institute for Supply Management showed factory and service sector growth holding up even with the severe cold. ISM’s manufacturing PMI improved from 51.3 in January to 53.2 in February. Weeks earlier, its service sector PMI had shown a 1% gain for January to 54.0.^.8,9.

GLOBAL ECONOMIC HEALTH

As February came to a close, the threat of combat in Ukraine hadn’t unsettled the markets to the degree it would in early March. The currency problems and capital flight plaguing the “Fragile Five” – as Morgan Stanley christened the economies of South Africa, Turkey, Brazil, India and Indonesia – moderated in February, with the average implied volatility of their currencies hitting 3-month lows weeks after touching 4-month highs.¹⁰

China’s official factory PMI read just 50.2 in February, an 8-month low. The preliminary HSBC/Markit PMI for China came in at 48.3 for January, signaling contraction of its manufacturing sector. China’s official service sector PMI, however, was at 55.0 last month (a 3-month high). India’s HSBC/Markit PMI was at 52.5 in February (its best reading in a year); South Korea’s fell to 49.8 (the first reading below 50 since October).^11,12

In the euro area, consumer inflation was still very low in February (0.8%) while the jobless rate was still high at 12.0%. Markit’s PMI for the eurozone manufacturing sector showed slower growth at 53.2 in February, down from 54.0 a month earlier – yet Markit manufacturing PMIs improved in Germany, Spain, Italy and France.^13,14.

WORLD MARKETS

As U.S. benchmarks reversed course and turned north in February, so did many others. Take the MSCI Emerging Market Index, up 3.19% last month; the MSCI World Index topped that gain with a 4.81% February climb. The Global Dow gained 3.95%, the Asia Dow 3.33% and the Europe Dow a tremendous 7.28%; the STOXX Europe 600 was up 4.81% for the month.^1,15

While Canada’s TSX Composite advanced 3.76% in February, the same couldn’t be said of Mexico’s IPC All-Share (-5.13%), Brazil’s Bovespa (-1.14%) or Argentina’s MERVAL (-3.89%). In the Asia Pacific region, Australia’s S&P/ASX 200 gained 4.14% in February; the Nikkei 225 dipped 0.49%.  Both the Shanghai Composite (1.14%) and the Hang Seng (3.64%) posted February gains. India’s Sensex rose 2.96%, Indonesia’s Jakarta Composite 4.96%; Pakistan’s KSE 100 lost 3.74%. In Europe, the FTSE 100 improved 4.60% in February; the CAC 40 was up 5.82%, the DAX 4.14%. Ireland’s ISEQ advanced 11.69%, and Russia’s RTS fell 2.59%.¹

COMMODITIES MARKETS

Coffee was hot in February – to put it mildly. Coffee futures jumped 42.57% for the month, the biggest gain by far among many in key crops. Soybeans rose 10.07% in February, corn 5.30%, wheat 7.67%, cotton 0.65%, cocoa 1.63% and sugar 5.92%.^16.

COMEX gold ended February at $1,321.60 per ounce following a 6.59% ascent for the month. Silver beat that, rising 10.78%. Copper rose just 0.59%; platinum futures advanced 5.20%. The U.S. Dollar Index slipped 1.99% for February, ending the month at 79.69.^16,17

Naturally, oil futures rose with emerging market concerns. NYMEX crude wrapped up February at $102.59. Its 5.49% monthly gain paled to that of the 13.58% rise made by unleaded gasoline futures. Natural gas was up 5.87% for February, while heating oil futures descended 6.23%.¹⁶

REAL ESTATE

According to the National Association of Realtors, January saw a 5.1% plunge in residential resales, with sales of single-family homes down 5.8%. Existing home sales were also down 5.1% across the past year.^7,18.

NAR also had pending home sales up just 0.1% in January; across the past 12 months, they had declined 9.0%. The Census Bureau delivered better news regarding new home purchases: a 9.6% January gain. December’s edition of the S&P/Case-Shiller Home Price Index showed a 13.4% annualized rise in house prices across 20 cities, slightly lower than the 13.7% yearly gain reported in the November edition. ⁷

January’s harsh weather meant no increases in groundbreaking: housing starts were down 16.0% in the largest monthly retreat seen since February 2011. Building permits declined 5.4%. ¹⁹

While 30-year home loans grew a little more expensive in February, Freddie Mac’s Primary Mortgage Market Survey showed average interest rates for other types of mortgages lower. From the January 30 survey to the February 27 survey, the average interest on a 30-year FRM increased 0.05% to 4.37%. Average rates on a 15-year FRM, however, were 0.01% lower on February 27 at 3.39%. Freddie’s February 27 survey also found average interest rates on 5/1-year ARMs and 1-year ARMs respectively at 3.05% and 2.52%; those averages declined 0.07% and 0.03% from the January 30 PMMS.²⁰

LOOKING BACK…LOOKING FORWARD

February’s percentage gains are even more striking when you realize that the first market day of the month saw a 326-point dive for the Dow. The S&P finished February with yet another record close – 1,859.45 – after a 4.31% ascent for the month. The Dow wrapped up February at 16,321.71, rising 3.97% in the second month of the year; the Nasdaq advanced 4.98% to wrap up February at 4,308.12. Last month was great for the small caps as well, with the Russell 2000 improving 4.61% to a February 28 close of 1,183.03. The CBOE VIX slid 23.95% during the month, ending February at 14.00. ^1,21

 Sources: online.wsj.com, bigcharts.com, treasury.gov – 2/28/14^{, 1,22,23}

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

March started much like February, with a triple-digit loss for the Dow as tensions in Ukraine weighed on investors’ minds. Would this be the “black swan” event so long absent from the stock market? Or would the current bull, now a week from its fifth anniversary, keep stampeding? The biggest possible economic threat stemming from the crisis might be the chance of eurozone economic sanctions against Russia, which in the worst-case outcome leads Russia to reduce energy exports to the euro area and sends the eurozone back into another recession. So far, this feels like a short-term event with an impact that may be muted on Wall Street (oil prices aside). The bull market has managed to saunter through many geopolitical and economic shocks since 2009, and its resilience may take investors through this one without too much negative impact. ²¹

UPCOMING ECONOMIC RELEASES:

Here is the data stream for the rest of March: February’s ISM services index and ADP employment change report, plus the latest Fed Beige Book (3/5), the February Challenger job-cuts report (3/6), the Labor Department’s February jobs report (3/7), January wholesale inventories (3/11), January business inventories and February retail sales (3/13), the University of Michigan’s initial March consumer sentiment index and February’s PPI (3/14), February industrial output and March’s NAHB housing market index (3/17), February housing starts and building permits, and the February CPI (3/18), a Fed policy announcement (3/19), February existing home sales and the Conference Board’s February leading indicator index (3/20), February new home sales data, the Conference Board’s March consumer confidence index, the January Case-Shiller home price index and the January FHFA housing price index (3/25), February durable goods orders (3/26), February pending home sales figures from NAR and the final estimate of Q4 growth from the federal government (3/27) , and then the University of Michigan’s final March consumer sentiment index and February consumer spending data (3/28).