Fed Gives Bullish Signals on Economy
Several Fed officials late last month believed the economy was set to grow even faster than when they elevated their growth projections at their December meeting, according to minutes of the Jan. 30-31 session, which were released Wednesday. Some officials also appeared more certain inflation would return to their 2% target over the coming year after years of consistently lagging behind. (…)
The minutes didn’t signal any immediate change in the Fed’s likely path of increases. But the stronger growth outlook, which was made before Congress approved a separate spending bill that should further boost economic demand this year and next, supports the current rate path and could serve as an important prerequisite for moving a touch more aggressively later this year. (…)
“A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate,” the minutes said. (…)
At the January Fed meeting, staff economists projected this measure would rise “notably faster in 2018” before reaching the 2% target in 2019 and remaining there after that. (…)
At the January Fed meeting, staff economists projected this measure would rise “notably faster in 2018” before reaching the 2% target in 2019 and remaining there after that. (…)
Home Sales Post Their Sharpest Drop in Three Years Sales of previously owned U.S. homes in January experienced their sharpest annual drop in more than three years as low inventories and rising prices and interest rates took a toll.
The National Association of Realtors reported on Wednesday that existing home sales in January fell 3.2% from December, versus the gain economists expected to see. Sales were 4.8% below their year-earlier level, marking the biggest annual decline since August 2014.
The NAR suggested tight inventories were to blame, and some economists also noted that bad weather may have delayed some sale closings. These might have affected January sales, but the bigger pressures hitting the housing market will play out this year. (…)
The median price of an existing home sold last month, at $240,500, was 5.8% higher than a year earlier.
And while they probably didn’t affect January home sales, higher mortgage rates could also bite into sales in the months to come. The average rate on a 30-year fixed mortgage was 4.38% during the week ended last Thursday, according to Freddie Mac, a level it has only briefly been higher than over the past five years. (…)
Weather must have been bad throughout the U.S. since all four regions showed weakness in January…and December, by the way. (Charts from Haver Analytics)
FLASH PMIs
U.S. private sector companies experienced a marked improvement in business activity growth during February. This was highlighted by a rise in the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index to 55.9, up from 53.8 in January and the highest reading for almost two-and-a-half years.
February data pointed to similarly sharp increases in both manufacturing production and service sector activity. The latter recorded a much stronger rate of expansion than at the start of 2018, helped by the largest rise in new work received by service providers since March 2015.
Stronger new business growth underpinned a robust upturn in private sector payroll numbers during February. The latest increase in staffing levels was the most marked since August 2015.
Confidence regarding the outlook for business activity over the next 12 months picked up to its strongest since May 2015. A number of survey respondents cited greater sales volumes at their business units and hopes of a sustained improvement in U.S. economic conditions.
Meanwhile, cost pressures continued to intensify in February, with the latest rise in average input prices the sharpest recorded since July 2013. Higher cost burdens and improving client demand contributed to the fastest rate of prices charged inflation for almost three-and-a-half years.
February data revealed a robust and accelerated expansion of U.S. service sector output. At 55.9, up from 53.3 in January, the seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index signalled the steepest rate of growth for six months. Moreover, the latest reading was one of the highest achieved since early-2015.
A continued rebound in new order volumes helped to support business activity growth during February. The latest upturn in new work received by service sector companies was the steepest since March 2015. Anecdotal evidence suggested that resilient business and consumer confidence had helped to boost sales volumes in the latest survey period. Service providers sought to expand operating capacity by taking on additional staff in February.
The rate of job creation was the fastest since August 2017, but this did not prevent a further rise in backlogs of work across the service sector. Moreover, stronger demand helped to support an improvement in business expectations for the next 12 months. February data indicated that service sector business confidence reached its highest since May 2015.
Input costs meanwhile increased sharply in February, with the latest rise the strongest for around four-and-a-half years. Average prices charged by service sector firms increased at the fastest pace since September 2014.
U.S. manufacturers reported a strong upturn in business conditions during February, which continued the positive trend seen at the start of 2018. At 55.9, up from 55.5 in January, the seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) pointed to the fastest improvement in overall business conditions since October 2014.
A sharp and accelerated rise in incoming new business helped to boost the headline PMI in February, while manufacturing production growth was little-changed since January. The latest rise in new order volumes was the steepest for around three-and-a-half years, which survey respondents attributed to greater sales to domestic clients alongside further export gains.
Improving manufacturing business conditions also reflected a robust rise in payroll numbers and sustained pre-production stock building in February. Meanwhile, there were signs of stretched supply chains, with delivery times from vendors lengthening for the fourteenth month running.
Greater demand for inputs and rising commodity prices contributed to a sharp rise in average cost burdens across the sector. The latest increase in manufacturing input prices was the fastest since December 2012. Efforts to alleviate pressure on operating margins led to the steepest rate of factory gate price inflation for just over four years in February.
Eurozone business activity continued to rise at a steep pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January. Price pressures and employment growth also remained elevated, though likewise saw rates of increase ease slightly. (…)
The headline IHS Markit Eurozone PMI fell from 58.8 in January to 57.5 in February, according to the estimate, which is based on approximately 85% of usual final replies. The slower growth of business activity reflected an easing in the rate of increase of new orders which, while elevated, slipped to a five-month low. (…)
At the eurozone level, the goods-producing sector continued to record a faster pace of expansion than the service sector, though growth of output and new orders slowed in both cases. However, both sectors continued to enjoy the best periods of expansion seen for seven years.
Despite slowing, the sustained growth of new business was sufficiently strong to encourage companies to boost staffing levels to one of the greatest extents seen over the past 17 years. Service sector jobs growth remained at the joint highest in a decade, while manufacturing payroll growth dipped further from recent 20-year record highs to a five-month low.
Backlogs of work continued to rise, indicating that firms on balance once again lacked sufficient capacity to meet demand. The increase was nonetheless the smallest for six months, reflecting the combination of recent hiring and slower inflows of new work.
Price pressures meanwhile remained elevated. The rate of input cost inflation and selling price inflation remained at levels exceeded only rarely since early-2011, dipping from January’s highs.
Higher prices were linked to improved pricing power amid stronger demand as well as incidences of upward salary pressures. The steeper rate of selling price inflation was seen in manufacturing, where average prices charged for goods at the factory gate showed the largest rise since April 2011, though service sector charges also showed the second-largest increase over the same period. (…)
The PMI readings for the first two months of the quarter generally provide a reliable guide to official GDP growth, and indicate that the eurozone economy is expanding at a quarterly rate of 0.9% in the opening quarter of 2018.
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Japanese manufacturing sector improves to softer extent
- Flash Japan Manufacturing PMI® edges lower to 54.0 in February (54.8 in January).
- Output and new orders both grow at slowest pace since October 2017.
- Employment growth accelerates to 11-year high.
February Japan flash PMI data is a fairly mixed bag overall. On the one hand, output and new business inflows increased to weaker extents, while recent yen appreciation has coincided with slower new export order growth. Furthermore, a number of panellists indicated that the stronger currency had prompted them to lower prices to overseas customers. Indeed, further yen strengthening will create unwanted drag on inflationary pressures.
That said, employment growth accelerating to an 11-year high signals confidence that expansionary output and demand trends will continue for the time being.
Index of 500 Stocks Is Powered by Just Three Tech titans Amazon, Microsoft and Netflix have fueled nearly half of the S&P 500’s advance this year, a worrying sign for investors expecting a strengthening economy to lift shares from other industries that typically improve with growth.
Amazon.com Inc. AMZN 0.99% has accounted for 27% of the broader index’s 1.6% gain through Tuesday, according to S&P Dow Jones Indices’ data. That is followed by Microsoft Corp. MSFT -1.33% , which has contributed 13%, and Netflix Inc. at 8.3%. U.S. stocks fell Wednesday, but Amazon and Netflix extended their 2018 gains, adding to their dominance over the S&P 500. (…)
Roughly a third of global fund managers say they are overweight technology stocks in their portfolios, according to a Bank of America Merrill Lynch survey conducted at the start of the month. That was the highest share of overweights of all 11 S&P 500 sectors. (…)
Startups Still In a Rut
Are alpha males worse investors? New research suggests high-testosterone traders earn lower returns
(…) A paper recently published by researchers at the University of Central Florida and Singapore Management University looks at the relationship between testosterone (a hormone associated with competitiveness and risk-taking) and investment performance. Using over twenty years of data on hedge-fund returns and thousands of images collected from Google, the authors find that fund managers with wider faces, a proxy for testosterone levels, tend to trade more frequently, invest in riskier securities and hold onto losing bets longer. As a result, between 1994 and 2015, high-testosterone fund managers (with an average facial width-to-height ratio of 2.10) underperformed low-testosterone ones (with an average ratio of 1.57) by 5.8% per year.
Is there anything investors can do to avoid testosterone-fuelled traders? One approach might be to seek out fund managers with long, thin faces. Or perhaps women and older men who are known to have less testosterone in their bodies. Another would be to bypass human managers altogether. If emotions inhibit traders’ ability to think rationally during market booms and busts, investors might be better off entrusting their money either to static index funds, or to trading algorithms without any emotions at all.
Full disclosure: I come out at 1.60…