Wintry Hit Seen in Soft Spending Americans are deferring spending for now in favor of saving, a cautiousness that has restrained broader economic growth despite signs household outlays may rebound later in the spring.
Consumer spending barely rose in February, increasing a seasonally adjusted 0.1% from the prior month after two consecutive declines, the Commerce Department said Monday. Spending on goods and services, when adjusted for inflation, actually declined slightly for the first time in 10 months.
As in 2014, bitter cold and snowstorms across much of the eastern U.S. appear this year to have cut into spending, and some private economists are marking down their estimates for first-quarter growth. (…)
Americans have more money in their pockets—personal income rose by 0.4% in February from the prior month, according to Monday’s report—but they’re holding on to more of it, at least for now. The personal saving rate climbed to 5.8% in February, its highest level since the end of 2012 and up from 4.4% as recently as November. (…)
The personal consumption expenditures price index, which is the Federal Reserve’s preferred inflation gauge, rose 0.3% in February from a year earlier, ticking up from a 0.2% annual gain the prior month.
Excluding the categories of food and energy, prices rose 1.4% on the year in February, firming slightly from 1.3% annual growth in January. U.S. gasoline prices rose slightly in February from the prior month, but still were down by a third from the same time last year, according to the U.S. Energy Information Administration. (…)
The truth is that the spending drought began in December. Real expenditures: Dec. +0.1%, Jan. +0.2%, Feb. –0.1%. Last 3 months: +0.2% (0.8% annualized).
The National Association of Realtors (NAR) reported that pending sales of single-family homes improved another 3.1% during February following a 1.2% January rise, last month reported as a 1.7% increase.
Home sales in the Midwest increased 11.6% (13.8% y/y) to the highest level since June 2013. Home sales in the West gained 6.6% (11.4% y/y). In the South, sales fell 1.4% (+10.8% y/y) while in the Northeast, home sales declined 2.3% (+4.1% y/y).
No winter effect in existing home sales (as was the case in new home sales): last 3 months, PHS are up 2.8% (+11.8% annualized). Northeast: –7.3% (-32.5% annualized), there’s your winter effect. South: +0.8% (+3.2% annualized)…
The floor has fallen out on first-quarter U.S. GDP forecasts, largely due to the strong dollar and inclement weather. Yesterday’s weaker-than-anticipated U.S. spending report is likely lead to additional downward revisions by economists, which in turn will probably push the consensus below 2 percent. While labor market growth is robust, retail sales have contracted for several consecutive months and manufacturing has been lackluster. GDP downgrades may eventually begin to affect second-quarter and full-year forecasts. Weakness elsewhere in the economy may also begin weighing on job growth.
Right on cue, revisions are here:
Forecasting firm Macroeconomic Advisers on Monday predicted growth at a 0.9% pace in the first quarter, down from its prior estimate of 1.1%. Barclays lowered its GDP estimate to 1% from 1.2%, while J.P. Morgan Chase said it sees growth close to 1% versus an earlier projection of 1.5%. (WSJ)
More current data provides hope, however. Led by auto dealers, homebuilders, airlines, and retailers (all front end), Evercore ISI company surveys have increased a significant +1.5 over the past four weeks after trending lower for six months. Better weather and port reopenings may be at work.
Growth of 2.8% is close to our forecast for growth through the year as a whole, of 2.0%. The shortage of official data through the Chinese New Year means that we have not updated the CMI since December, when it stood at a downwardly-revised 3.5%.
The CMI is based on three ‘easy-to-measure’ indicators of economic activity favoured by Premier Li Keqiang. These are: rail freight volumes; electricity production; and credit growth. Rail freight volumes are volatile from month to month, and strongly seasonal. Nevertheless, the fall in February was substantial, and accounts for much of the weakness in our CMI. Electricity production fell by 7.6% through January and February compared with the same period a year ago.
Credit growth strengthened a little on the month, perhaps in response to cuts in the main policy rates of interest towards the end of last year. The Agricultural Bank of China last week announced that profits had fallen by the most in three years. At the same time, it revised up its estimate of non-performing loans to a new record of just over 1.5% of all assets. Our firm view is that China’s non-performing loan problem is far, far larger than official statistics suggest. We estimate that non-performing loans across the banking system as a whole are equal to around 21% of GDP – or close to 8% of bank assets.
In China, however, Evercore ISI company surveys of China sales do not offer much hope of a turnaround as China sales declined last week to a very weak 41.4. But don’t worry, this the time when bad news is good news:
The European Union’s statistics agency Tuesday said consumer prices were 0.1% lower than a year earlier, having fallen 0.3% in February and 0.6% in January. (…)
The slowdown in the pace of price falls has largely been due to a modest rebound in energy costs. Energy prices were 5.8% lower than a year earlier in March, having been down 7.9% in February and 9.3% in January.
However, there was a reminder for policy makers that lower energy costs may lead to slower increases or outright declines in the prices of other goods and services, as the core rate of inflation fell to 0.6% from 0.7% in February. (…)
Eurostat Tuesday said the eurozone’s rate of unemployment fell in February to 11.3% from 11.4% in January, although the January figure was revised higher from 11.2%. Eurostat said the number of people without work fell by 49,000 during the month, leaving 18.2 million people without work.
The decline in the jobless rate looks set to continue. Germany’s Labor Agency said on Tuesday the seasonally adjusted unemployment rate fell again, reaching 6.4%, after hitting 6.5% in February, which was the lowest level since German reunification. The agency said that unemployment declined by 15,000 in adjusted terms in March, which beat the fall of 12,000 expected by economists in a Wall Street Journal survey.
However, German retail sales fell in line with expectations in February, slightly reversing the solid expansion seen in the previous two months, while the annual reading suggests that consumer spending remains a pillar of growth in Europe’s largest economy.
In France, consumer spending rose 0.1% on the month and 3.0% on the year in February, both in line with economists’ forecasts.
Bank of Canada chief bemoans oil fall Slump having ‘atrocious’ effect on country’s economy
(…) even as he expressed confidence that a cheaper currency and an incipient US revival would help exports drive a recovery.
Stephen Poloz said that the central bank still had many options to help the economy if needed. These included pledges to keep interest rates low for a prolonged period of time — a practice known as “forward guidance” — as well as asset purchases.
(…) strategists at Citigroup and J.P. Morgan Asset Management say the recovery and the stock market’s run higher still have a few years ahead of them.
That’s because equities have a track record of performing well through the back end of the business cycle. In fact, in the last part of the past three expansion periods, the S&P 500 has returned an average 13%, according to Citigroup. Over the past 30 years, business cycles have usually lasted about nine years trough to trough. And Citi says market gauges suggest we are roughly 70% through the current recovery.
The bank argues stocks’ trend is still to the upside for three reasons. First, there are not many signals of overextension. Capital expenditures, for example, are below the long-term average as companies have instead been more enthusiastic about returning money to shareholders via buybacks. Second, consumers have delevered from their post-crisis peaks when looking at a ratio of debt as a percentage of disposable income. And third, monetary policy remains loose.
Anastasia Amoroso, global market strategist at J.P. Morgan Asset Management, adds that we are not yet in a stage where an incentive to save exists. She says that is the pivotal point in the business cycle and thinks we are a little over midway through the expansion.
Business cycles typically turn when tighter monetary policy restrains credit availability, which has the effect of putting a lid on economic growth. “With the federal funds rate still at zero, the current and prospective monetary policy stance is years away from ‘choking off’ growth,” commented Citigroup strategist Stephen Antczak.
While markets are on edge about when the liftoff in interest rates will come, the initial increase is expected to be small and the pace of normalizing monetary policy is forecast to be gradual. The beginning phase of fractionally higher rates is unlikely, therefore, to create a drastically different economic picture, which should be good for stocks.
Not a word on profits and/or valuation…
This is the season:
Seasonals Suggest Stocks Could Gain in April A popular saying goes that April showers bring May flowers. For the stock market, the opposite is typically true.
April is generally a robust month for stocks before investors “sell in May and go away.” Since 1950, the Dow Jones Industrial Average has averaged a 1.9% gain in April, its best month, according to Stock Trader’s Almanac. For the S&P 500, April ranks as the second strongest month, with the large-cap index averaging a 1.5% increase since 1950.
(…) Major indexes were down in January, up big in February, but down again in March. Until Monday the S&P 500 had gone 28 straight sessions without booking back-to-back gains. That has only happened twice since 1957.
While April is historically an up month, investors may have to wait to see the trend play out. April’s gains – at least during the past decade – have come in the latter half of the month, according to Bespoke Investment Group. The S&P 500 has seen a median rise of only 0.3% in the first half of April during the past 10 years. In the back end of the month, though, the S&P 500 has booked a median increase of 1.8%.
Tax season helps explain the split performance of April, says Bespoke co-founder Paul Hickey. On one hand, people who owe money sometimes sell securities in order to raise funds to pay their taxes by the April 15 filing deadline. On the flip side, some of the money coming in to the market in the last two weeks of the month can be attributed to tax refunds getting put to use via share purchases, Mr. Hickey adds.
Earnings may also affect performance in April as reporting season gets underway next week.
While history is no sure measure of future performance, the S&P 500 and Dow Jones Industrial Average have risen in April 69% and 66% of the time, respectively, since 1950, according to Stock Trader’s Almanac. That’s a fairly decent trend.
But equity markets generally tend to rise 66% of the time…
Easter is right around the corner, and the seasonality around the week of Good Friday is pretty mixed. Historically, the week ending on Good Friday has been a good time to hold stocks, with average returns of 83 bps since 1945 and 58 bps in the last thirty years. But as shown below, this year we’ve seen dramatic underperformance versus the historical average since Ash Wednesday. In those scenarios where the index finishes the Ash Wednesday to Good Friday stretch down, we tend to see underperformance in the final week of the time frame, as shown in the table at left.
Too complicated? Here’s a simpler way:
In China, eight is a lucky number and four is not. Eight in Chinese sounds like “prosperity,” and four sounds like “death.” As a way to dismiss the seriousness of Asian investors, a myth has developed that stocks whose numerical ticker symbols contain an 8 do best, and 4 the worst.
Markus Rosgen, Asia equity strategist at Citigroup found that in Hong Kong, the opposite is true: Tickers that start with 4 have outperformed 8 over the long run, with annualized returns of 3.3% compared to 2.8% for 8. Neither are all that hot, actually, as 3 wins the day with 16.4% returns. Mainland Chinese stocks are different still, where 8 does outperform 4, but 2 wins the day. In nearby South Korea, 8 is actually the most profitable ticker digit. Too bad, though that in Korea, 7 is the standard lucky number.
And April’s fool day is only tomorrow.