April Economic Update

April 2018

THE MONTH IN BRIEF
In March, stocks faced another significant challenge. The Trump administration’s sudden plan to institute tariffs on imports sent a shudder through the bulls. All three major Wall Street benchmarks fell more than 2.5% during the month as investors around the world considered the prospect of trade wars involving American, Chinese, and European products. The Federal Reserve raised the target range for the federal funds rate by another quarter point; mortgage rates were little changed for the month, and existing home sales improved. In Europe, leaders agreed on how the Brexit would unfold. The value of bitcoin declined, while gasoline and oil futures rallied. All in all, it was an eventful and volatile month for the economy and the markets.¹

DOMESTIC ECONOMIC HEALTH
As March began, President Trump announced that the U.S. would soon impose tariffs of 25% on imported steel and 10% on imported aluminum. Those excise taxes were authorized before the month ended; some nations (including Canada and Mexico) received short-term exemptions from them. Another set of tariffs, about $60 billion annually, were envisioned for various Chinese imports. This last action prompted a direct reaction in China (see “Global Economic Health” below). ^2,3

The nation’s central bank lifted the benchmark interest rate slightly. Making its sixth, quarter-point hike in less than a year and a half, the Federal Reserve increased the target range on the federal funds rate to 1.50-1.75%. The dot-plot representing the consensus forecast of Fed policymakers still showed a total of three rate hikes for 2018. (Three hikes are also projected for 2019.) ⁴

While investors fretted over possible economic backlash from tariffs, fundamental economic indicators largely delivered good news. Non-farm payrolls swelled with 313,000 net new hires in February, according to the Department of Labor; the headline unemployment and U-6 unemployment rates were respectively unchanged at 4.1% and 8.2%.^.5.

Manufacturing output improved 1.2% in February, while industrial output was up 1.1% (and 4.4% year-over-year). The Institute for Supply Management’s manufacturing purchasing manager index climbed to 60.8 in February, rising 1.7 points. ISM’s service sector PMI declined 0.4 points in February to a still-impressive 59.5.^.5,6

Household spending increased by 0.2% in February according to the Department of Commerce, with household incomes up 0.4%. The two most-respected consumer confidence indices were still at lofty heights. The University of Michigan’s gauge went from 99.7 at the end of February to a preliminary March mark of 102.0, then a final March reading of 101.4; the Conference Board’s barometer declined to 127.7 from 130.0. ⁵

As for inflation pressure, it moderated slightly: the annualized rise of the Consumer Price Index ticked up to 2.2% in February, with the annualized core CPI gain remaining at 1.8%. Producer prices, though, were up 2.8% year-over-year through February. ⁵

GLOBAL ECONOMIC HEALTH
China followed America’s declaration of tariffs on Chinese imports with a plan to levy excise taxes on U.S. products arriving at its borders. It threatened to tax as many as 120 different products (including wine and fruit) with a 15% tariff, unless both nations settled their trade differences “within a stipulated time.” China also suggested that a 25% excise tax could apply to another set of U.S. imports, including aluminum and pork. While Secretary of Commerce Wilbur Ross said in late March that the U.S. was willing to resume negotiations over the Trans-Atlantic Trade and Investment Partnership, leaders of European Union nations were concerned about what would happen after May 1, when the short-term E.U. exemption from steel and aluminum tariffs would run out. E.U. leaders have requested a permanent exemption from the U.S. metals tariffs and threatened excise taxes on U.S. imports if that does not happen. ^7,8

The United Kingdom’s path to leaving the E.U. became a bit clearer in March, thanks to new terms agreed to between E.U. and U.K. diplomats. After leaving the E.U. in March 2019, the U.K. will keep all E.U. rules in effect through the end of 2020, while forfeiting its ability to have any say in E.U. decisions. Ireland remains a question mark; an agreement signed in 1988 lets goods and people move through Ireland freely, without a formal border crossing; instituting a formal border could impede trade and travel to and from that republic. ⁹

WORLD MARKETS
A few consequential foreign benchmarks rose last month, but not by much. There were gains of 0.39% for Malaysia’s KLSE Composite, 0.43% for Taiwan’s TSE 50, and 0.76% for South Korea’s Kospi. Brazil’s Bovespa was flat (up 0.01%). ¹⁰

There were many retreats. The MSCI World index lost 2.48%; the MSCI Emerging Markets index, 2.17%. Both Indian benchmarks slipped: the Nifty 50 slumped 3.61%; the BSE Sensex, 3.56%. The Shanghai Composite lost 2.77%; the Hang Seng, 2.44%; the Nikkei 225, 2.78%. Australia’s All Ordinaries tumbled 4.06%. Argentina’s Merval dove 5.74%; Mexico’s Bolsa retreated 2.77%. The major western European indices all lost 2% or more last month: the FTSE 100 sank 2.42%; the DAX, 2.73%; the FTSE Eurofirst 300, 2.35%; the CAC 40, 2.88%; the IBEX 35, 2.44%. Russia’s Micex only fell 1.12%. In Canada, the TSX Composite lost 0.49%.^10,11

COMMODITIES MARKETS
Energy futures advanced significantly in March. Out in front, unleaded gasoline jumped 16.71%; heating oil gained 6.82%; WTI crude, 5.51%; natural gas, 2.40%. Oil’s rise left the NYMEX price at $64.94 at the close on March 29. Another big March jump occurred for a crop: cocoa surged 15.84%. While corn added 3.68% last month, a few other notable ag futures posted declines big and small: soybeans retreated 0.05%; cotton, 1.77%; coffee, 1.91%; wheat, 6.58%; sugar, 8.38%. ¹²

The U.S. Dollar Index also took a March loss, albeit one of only 0.51%; it settled at 90.15 on March 29. ^13,14

Three of the four key metals lost ground in March as well. Copper descended 2.69%; silver, 0.35%; platinum, 6.01%. Gold rose 0.36%. On the COMEX, gold finished March at $1,327.30; silver, at $16.27. ¹²

REAL ESTATE
Existing home sales picked up 3.0% in February, according to the National Association of Realtors. That gain occurred even with just 3.4 months of inventory available; the typical home sold in February stayed on the market for just 37 days. NAR’s pending sales index rose 3.1% in February, a very good signal for March. New home buying weakened 0.6% in February, the Census Bureau noted; that marked a third consecutive monthly decline. ^15.

A major dip for apartment construction sent total housing starts down 7.0% in February; the Census Bureau also reported a 5.7 % fall for building permits. As for home prices, the lagging S&P CoreLogic Case-Shiller Composite Home Price Index (most recent edition: January) still shows them up 6.4% year-over-year. ^5,15

Mortgage rates were almost unchanged last month. The average interest rate for the 30-year, fixed-rate loan was at 4.44% in Freddie Mac’s March 29 Primary Mortgage Market Survey, just 0.01% higher than on March 1. While the average interest on the 5/1-year ARM rose 0.04% in that period to 3.66%, the average interest rate for the 15-year FRM was 3.90% in both survey editions. ¹⁶

LOOKING BACK…LOOKING FORWARD
Volatility spiked in late March, yet the CBOE VIX really did not rise much for the month: 0.60%. The Russell 2000 advanced 1.12% for March. The big three suffered big losses: the Nasdaq Composite fell 2.88%; the Dow Jones Industrial Average, 3.70%; the S&P 500, 2.69%. The settlements on March 29: DJIA, 24,103.11; S&P, 2,640.87; COMP, 7,063.45; RUT, 1,529.43; VIX, 19.97. ^1,17

Sources: finance.google.com, bigcharts.com, treasury.gov – 3/29/18 ^17,18,19,20

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

not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

Investors weary from two rough months for equities have something to look forward to in April: a new earnings season begins in the middle of this month. In recent years, April has been a very good month for the market; the S&P 500 has advanced in nine of the past ten Aprils, in fact. The index has averaged a 1.5% gain in April since 1950. What will happen in April 2018 is anybody’s guess, but bulls may be reassured by such Wall Street history. In addition, a forecast from FactSet is worth noting: the stock market analytics company projects that S&P 500 firms will report an 18% increase in earnings for fiscal 2018. If that happens, it would be the strongest annual earnings growth in eight years. It is hard to imagine the stiff headwinds now on Wall Street abruptly easing up, but perhaps stocks will take a turn for the better as the second quarter proceeds. ²¹

UPCOMING ECONOMIC RELEASES:

In addition to earnings calls, investors will pay attention to these news items in April: the March ISM non-manufacturing PMI, February factory orders, and ADP’s March employment change report (4/4), a new Challenger job-cut report (4/5), the Department of Labor’s latest employment report (4/6), the March Producer Price Index (4/10), the March Consumer Price Index and minutes from the last Federal Reserve policy meeting (4/11), the University of Michigan’s preliminary April consumer sentiment index (4/13), March retail sales (4/16), March industrial output and construction activity (4/17), a new Beige Book from the Fed (4/18), the Conference Board’s latest index of leading indicators (4/19), the March snapshot of existing home sales from the National Association of Realtors (4/23), March new home sales and a new consumer confidence index from the Conference Board (4/24), March durable goods orders (4/26), the final April University of Michigan consumer sentiment index and the first estimate of Q1 GDP from the Bureau of Economic Analysis (4/27), and then March consumer spending and pending home sales and the March PCE price index (4/30).