March Economic Update

Monthly Economic Update

March 2013

THE MONTH IN BRIEF
As February ended, a central question seemed to preoccupy Wall Street: “When will the Dow hit a new record high?” Nothing seemed to shake the Street’s upbeat mood – not the $85 billion in federal budget cuts slated for March 1, not the real estate bubble in China or political uncertainty in Italy, not the still-anemic Q4 GDP reading or the abrupt decline in personal incomes. All told, the data stream offered much to keep Wall Street in a good mood: impressive numbers from the housing sector, rebounding consumer sentiment, continuing expansion in the manufacturing and service sectors. So the Dow ended the month at 14,054.49, with bulls holding an unyielding belief that it could reach a new all-time high in March – and the index did just that.^1,2

DOMESTIC ECONOMIC HEALTH
February wrapped up with no agreement between Congress and the White House to postpone the sequestration – a 9% budget reduction for domestic programs, a 13% reduction for defense programs and a 2% cut in Medicare payments to physicians. March 27 presents a deadline for an appropriations bill to keep federal government operations sufficiently funded; the sequester cuts might be retroactively altered or undone as a result.³

Word came from the Commerce Department that consumer incomes fell 3.6% in January, a clear effect of higher payroll taxes. Yet consumer spending held up, rising 0.2% in that month. So did consumer sentiment: the University of Michigan’s monthly index was at 77.6 in February, and the Conference Board’s consumer confidence poll soared to 69.0 last month, even with the jobless rate at 7.9%.^4,5

If a rising stock market and general perception of an improving economy influenced the above numbers, tame inflation may have as well. In January, the Consumer Price Index was flat again. Retail prices had only increased 1.6% in 12 months. The troubling asterisk: core CPI (with food and energy prices factored out) rose 0.3% in January, a gain unmatched since May 2011. Also, retail sales increased just 0.1% in January compared to 0.5% in December. Wholesale inflation (as measured by the federal government’s Producer Price Index) was up 0.2% for January, and had increased 1.4% in the past year.^6,7,8

The world certainly pays attention to the Institute for Supply Management’s twin purchasing manager indices, and the latest readings on the economy from ISM have been quite positive. Its non-manufacturing index rose to 54.2 in February (the best mark since June 2011) while its service sector index read 56.0 last month, up from 55.2 in January for the highest reading in 12 months.^9,10

When the Federal Reserve’s January policy meeting minutes came out, they raised eyebrows – the Federal Open Market Committee had agreed to review its easy money policies in March, perhaps signaling an earlier-than-expected end to QE3.  The Bureau of Economic Analysis revised its estimate of Q4 GDP to +0.1%.^5,11

GLOBAL ECONOMIC HEALTH
By the end of the month, Wall Street had one eye on China and another on Italy. The PRC finally set some limits on its runaway real estate market, imposing a whopping 20% capital gains tax on real property sales, demanding higher mortgage rates and down payments and requiring cities to adopt yearly price easing targets for their housing markets. China’s manufacturing PMIs barely showed expansion in February: the official PRC PMI came in at 50.1, while the HSBC PMI read 50.4. The People’s Bank of China forecasts 3% inflation in 2013, compared to 2.6% in 2012; Bloomberg sees China’s economy growing 8.1% in 2013, up from the 13-year low of 7.8% recorded by its government last year. ^12,13

Italy’s national election produced a deadlock, raising fears that austerity measures stipulated by the European Central Bank could be rejected. Incumbent Prime Minister Mario Monti had been effectively challenged by Beppe Grillo, a populist fiercely opposed to the euro, and – of all people – disgraced former Prime Minister Silvio Berlusconi. (Italy’s jobless rate hit a 21-year peak of 11.7% in February.) On the upside, European Commission president José Manuel Barroso announced a federal surplus in Ireland and smaller payment imbalances for Italy, Portugal, Spain, and Greece. On the downside, the smaller deficits for those last four nations could be traced largely to a reduction in imports stemming from sinking demand.^4,14  

WORLD MARKETS
Foreign benchmarks experienced much more turbulence than ours last month. A list of some losses: Hang Seng, -3.29%; NIFTY 50, -6.55%; MERVAL, -11.95%; Bovespa, -3.91%; Euro STOXX 50, -2.57%; CAC 40, -0.26%; DAX, -0.44%; MSCI World Index, -0.02%; MSCI Emerging Markets Index, -1.35%. The gains: S&P/ASX 200, +3.27%; KOSPI, +3.51%; TOPIX, +3.79%; FTSE 100, +1.34%; TSX Composite, +1.08%; S&P Asia 50, +0.52%.^1,15

COMMODITIES MARKETS

When was the last time gold racked up a five-month losing streak on the COMEX? You have to go back to 1997 to find another example of that, yet that was its dubious achievement in February. All key metals seemed to retreat last month: gold went 5.0%, silver -9.3%, copper -4.9%, platinum -5.5% and palladium -1.5%. Gold settled at just $1,572.30 on the COMEX on February 28. The perception of an improving economy also hurt oil, which ended February at $92.05 a barrel, its lowest NYMEX settlement price of the year. (It would head lower in early March). Natural gas futures, rose 4.4% in February. The U.S. Dollar Index rose 3.46% last month.^16,17,18

REAL ESTATE
Could a seller’s market be emerging? That possibility doesn’t seem so absurd given the latest round of indicators. Existing home sales had improved 0.4% in January even as the inventory of homes reached its lowest level April 2005, the National Association of Realtors noted; year-over-year, home prices were up 12.9%. NAR also found pending home sales rising 4.5% in January, and December’s S&P/Case-Shiller Home Price Index recorded a 6.8% 12-month increase. January also saw a 15.6% jump in new home sales, which had increased 28.9% in a year.^19,20,21,22

Between January 31 and February 28, home loan rates generally decreased. In that interval (according to Freddie Mac), the average interest rate on the 30-year FRM went from 3.53% to 3.51%. Average rates for the 15-year FRM went from 2.81% to 2.76%; the 5/1-year ARM, 2.70% to 2.61%; the 1-year ARM, 2.59% to 2.64%.²³

LOOKING BACK…LOOKING FORWARD
In addition to the gains logged by the big three in February, the Russell 2000 rose 1.00% to end the month at 911.11. The DJIA ended February at 14,054.49, the NASDAQ at 3,160.19 and the S&P 500 at 1,514.68.^1,24

Sources: online.wsj.com, bloomberg.com, bigcharts.com, treasury.gov – 2/28/12^1,25,26,27

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

These returns do not include dividends.

While the Dow hit a new intraday high and closed at a record high on March 5, the underappreciated factoid is that the S&P 500 advanced in both January and February. As CNBC.com columnist Bob Pisani noted recently, that has happened 26 times since 1945. In each of those 26 years, the S&P finished up for the year. In 24 of those 26 years, its gain was 10% or better. In fact, the average annual ascent across those 26 years (including yield) was 24%. Historical data is simply a rear-view mirror and no guide to the future – but bulls are as optimistic as ever about this market. Could another deficit battle on Capitol Hill set stocks back? Will developments in Europe exert a drag? At this moment, little seems to shake the faith of Wall Street, which sees a clearly improving economy and a market climate with weaker headwinds.²⁸

UPCOMING ECONOMIC RELEASES:

For the balance of March, the economic calendar plays out as follows: January  factory orders and a new Fed Beige Book (3/6), the Labor Department’s February job report and January wholesale inventories (3/8), February retail sales and January business inventories (3/13), the February PPI (3/14), February’s CPI and industrial production and the University of Michigan’s preliminary March consumer sentiment survey (3/15), the March NAHB housing market index (3/18), February housing starts and building permits (3/19), a Fed policy announcement (3/20), February existing home sales, January’s FHFA housing price index and the Conference Board’s February Leading Economic Indicators index (3/21), February new home sales and durable goods orders, the Conference Board’s March consumer confidence poll and the January Case-Shiller home price index (3/26), February pending home sales (3/27), the final estimate of Q4 GDP (3/28), and February consumer spending and the final March University of Michigan consumer sentiment survey (3/29).