March Economic Update

March 2015

THE MONTH IN BRIEF
What a difference a month makes. After a rough January, the S&P 500 soared 5.49% in February. Steadying oil prices, solid earnings, improving indicators in Europe and Asia and central bank action all prompted the bulls to run freely. Stateside, inflation gave way to a touch of deflation, home sales cooled off and consumer spending and confidence were disappointing – but the labor market was in good shape and so were the manufacturing and service sectors. February brought some reassuring economic news, and that was all Wall Street needed for a rally..¹

DOMESTIC ECONOMIC HEALTH
Cheaper fuel and energy costs meant two things: less consumer spending and falling consumer prices. Important economic indicators reflected these developments. January’s Consumer Price Index dipped 0.7% (although the core CPI rose 0.2%), resulting in annual deflation in the United States for the first time since October 2009. Personal spending lagged 0.2% during January. The federal government also reduced Q4 GDP in its second estimate, taking growth down to 2.3% from the previously announced 2.6%. ^2,3

Consumer confidence retreated, perhaps in the wake of a bad January for stocks and word that gas prices were poised to go back up. February’s Conference Board index slipped 7.4 points to 96.4; the final February University of Michigan consumer sentiment index came in at 95.4, down from 98.1 in the final January survey. ^2,4

Fortunately, there was enough good news to offset the bad. The Labor Department’s January jobs report showed 257,000 new hires. Companies were hiring at the fastest clip in 18 years – non-farm payrolls had swelled by an average of 336,000 workers a month from November-January. The unemployment rate did tick north to 5.7% in January and the underemployment (U-6) rate was up at 11.3%, but this reflected an increase in job seekers. Hourly wages were up 0.5% in January, personal incomes up 0.3%.^.2,5.

America’s manufacturing sector continued to grow and expand. February’s ISM factory PMI came in at 52.9, not too far off of January’s 53.5 reading; the Federal Reserve found manufacturing output up 0.2% for that month. ISM’s service sector PMI had notched a reading of 56.7 for January, rising 0.2 points. Hard goods orders improved 2.8% in January after slipping 3.7% in December. The Producer Price Index declined 0.8% in January thanks largely to a record 10.3% monthly plunge for wholesale energy prices (January saw a seventh consecutive monthly decline).^.2,6.

Fed chair Janet Yellen underlined the central bank’s commitment to patience on raising interest rates in her February testimony before the Senate banking committee, saying it seemed “unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.” ⁷

GLOBAL ECONOMIC HEALTH
There was no “Grexit” in February: Greece and the European Union hammered out a deal in principle to extend aid to that nation’s beleaguered economy through the end of June. (Without a deal, the €240 billion bailout for Greece would have ceased at the end of February). Greece remained on shaky ground with the EU and the International Monetary Fund, but at least it remained in the eurozone. A Eurostat flash estimate showed euro area deflation halved in February from January levels (consumer prices retreated only 0.3% annually as opposed to 0.6%). Unemployment ticked down to 11.2% in the 19-country euro area in January, a 33-month low. ^8,9

February ended with a surprise from the east: the People’s Bank of China made its second interest rate cut in three months (the benchmark rate was lowered 0.25% to 5.35%). Also, the final February HSBC/Markit China manufacturing PMI showed sector growth again at a better-than-expected 50.7 reading, up a full point in a month. February HSBC/Markit factory PMIs in other key Asia Pacific nations were all above 50 as well: 52.9 in India, 51.6 in Japan, and 51.1 in South Korea. ^10,11

WORLD MARKETS
Just how good was February for stocks? You not only had all-time highs for the S&P and Dow by the end of the month, you also had historic peaks for Germany’s DAX and Great Britain’s FTSE 100 and Japan’s Nikkei 225 reaching a 15-year high. ¹²

Almost all foreign indices of note rose last month – two that didn’t were Turkey’s BIST 100 (-5.39%) and Pakistan’s KSE 100 (-2.36%). Another two indices actually gained more than 20% for February – Russia’s RTS index (21.60%) and Greece’s ATG index (21.96%). Elsewhere in Europe, you had the following gains: FTSE MIB, 8.95%; STOXX 600, 6.85%; DAX, 6.61%; FTSE 100, 2.92%; CAC 40, 7.54%; ISEQ, 9.24%; Europe Dow, 6.39%. On other continents, more gains: Asia Dow, 4.93%; Nikkei 225, 6.36%; S&P/ASX 200, 6.09%; Hang Seng, 1.29%; Sensex, 0.13%; Shanghai Composite, 3.11%; Dow Jones Americas, 5.50%; Bovespa, 9.97%; IPC All-Share, 7.91%; TSX Composite, 3.82%. February saw the Global Dow advance 5.78%; the MSCI World Index rose 5.68% on the month, the MSCI Emerging Markets Index far less at 2.98%. ^1,13

COMMODITIES MARKETS
Oil found a floor and took a step up: on the NYMEX, light sweet crude ended the month at $49.76 a barrel, going +3.32% for February. The big leap was taken by RBOB gasoline, which rose 24.43% on the month. February also saw gains of 14.74% for heating oil and 1.05% for natural gas. Cocoa futures were up 15.59% for February, corn futures 3.58%, cotton futures 7.87%, soybean futures 7.24% and wheat futures 3.59%. Last month’s losers among ag futures included coffee (-15.10%) and sugar (-5.81%).^14.

Gold retreated 4.70% to $1,213.10, silver 2.56% to $16.56. Platinum fell 3.60%. As for the U.S. Dollar Index, it wrapped up February at 95.29 (+0.52% on the month).^.14,15

REAL ESTATE
Brutal weather across two-thirds of the country held homebuying back. The Census Bureau found new home sales tailing off 0.2% in January. More significantly, the National Association of Realtors measured a 4.9% fall in existing home sales. The NAR did announce a 1.7% January gain in its pending home sales index. According to the latest S&P/Case-Shiller home price index, prices across 20 major metro areas climbed an average of 4.5% during 2014. ^2,16.

Snow, sleet and ice had also slightly hindered new construction. The Census Bureau reported groundbreaking down 2.0% for January, and there were also 0.7% fewer building permits issued. Starts were still up 18.7% from a year prior, and permits were 8.1% above year-ago levels. ¹⁷

Home loan interest rates increased in February. Freddie Mac’s February 26 Primary Mortgage Market Survey found the average interest on a 30-year FRM at 3.80%, a 15-year FRM at 3.07%, a 5/1-year ARM at 2.99% and a 1-year ARM at 2.44%. In its January 29 survey, interest averaged 3.66% for the 30-year fixed, 2.98% for the 15-year fixed, 2.86% for the 5/1-year ARM and 2.38% for the 1-year ARM. ¹⁸

LOOKING BACK…LOOKING FORWARD
February brought a major drop for the CBOE VIX; the so-called “fear index” ended the month 36.39% lower at 13.34. The Nasdaq climbed 7.08% to 4,963.53, the Russell 2000 5.83% to 1,233.37, the Dow 5.64% to 18,132.70 and the S&P 5.49% to 2,104.50. February, in fact, was the S&P’s hottest month since October 2011. ^1,12

Sources: online.wsj.com, bigcharts.com, treasury.gov – 2/27/15 ^1,19,20,21

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

These returns do not include dividends.

March opened with the Nasdaq closing above 5,000 for only the third time in history and the S&P, Russell 2000 and Dow all settling at record levels. Have headwinds suddenly ceased? No. In Europe, the restructured Greek debt deal is still a shaky one, deflation is lingering and the jobless rate is twice ours. Demand for key commodities isn’t where it was two years ago; oil prices are half what they once were. Warnings that the majority of stocks are overvalued continue, with bears maintaining that the S&P will only make a minor gain for 2015. Still, the bulls staged a remarkable return last month and March has begun with the sense that obstacles have been cleared from their path. While this bull market is growing venerable, it does not yet seem vulnerable to many investors. ²².

UPCOMING ECONOMIC RELEASES:

The roll call of indicators and reports for the rest of March includes … February’s ISM services PMI, a new Fed Beige Book and ADP’s February job-change report (3/4), February’s Challenger job-cut report (3/5), the February employment report from the Labor Department (3/6), January wholesale stockpiles (3/10), January business stockpiles and February retail sales (3/12), the February PPI and March’s initial consumer sentiment index from the University of Michigan (3/13), February industrial output (3/16), February housing starts and building permits (3/17), a Fed policy statement (3/18), the February set of leading economic indicators from the Conference Board (3/19), February existing home sales (3/23), February new home sales and February’s CPI (3/24), February hard goods orders (3/25), the final estimate of Q4 GDP plus the University of Michigan’s final March consumer sentiment index (3/27), February personal spending and pending home sales (3/30), and finally the Conference Board’s March consumer confidence index and the January edition of the Case-Shiller home price index (3/31).