Economic Outlook: Sluggish First Quarter; Where to Now?
- It is fairly clear that the manufacturing sector has shown a somewhat sluggish start for the year; the Fed’s Industrial Production report posted a mere 0.1% increase in March.
- Other key data points trended down in the first quarter (retail sales, housing starts, and business permits).
- Housing data, by contrast, looked a little bit better as we move into the stronger spring selling season. The National Association of Home Builders Housing Market Index increased to 56 in March from 52, signaling renewed confidence in housing activity
- Housing starts also rebounded slightly, advancing 2.0% in March according to HUD.
- In a somewhat surprising move, Retail Sales (excluding Autos and Gasoline) bounced back after a 3 month run that has been pretty weak, increasing 0.5% (or roughly 6.0% annualized) in March (Dept. of Commerce).
- Core CPI is showing some life, moving up 0.2% in March and +1.8% year-over-year. The last 3 months core CPI is running at a 2.3% rate (Bureau of Labor Statistics).
- Of course year-over-year CPI is lower, showing flat prices. This result is almost entirely attributable to falling energy prices.
- The Conference Board’s leading indicators continued to increase and posted an advance of 0.2%.
- February showed a nice bounce in European Union Industrial Production, with a 1.1% increase. It will be interesting to see if that momentum can be sustained.
- China 1Q GDP comes in right where China said it would, at 7.0% growth (National Bureau of Statistics China)
- China Retail Sales are up 10.2% year-over-year, which is high on an absolute level but lower relatively.
Equities Outlook: Concerns in the Markets.
- The U.S. equity market had a big sell-off on Friday, wiping out previous gains for the week.
- A combination of factors may account for the jitters in the equity markets. At the head of the list, Greek exit concerns are back in the limelight. Greece is confronting $1.1 billion of debt repayments in the next month.
- In addition, China has been tightening stock margin trading rules.
- Oil prices are up about 30% from the lows of this cycle. In every price trough since 1985, once prices bounced 30% off the lows, they never returned to the lows and on average, were 28% higher six months later. Hard to say if we will see a repeat this time, but if in fact it does, it eliminates a major uncertainty for markets.
Fixed Income Markets: Low Rates for a While Longer.
- Atlanta Fed President, Dennis Lockhart, stated last week: “Data available for the first quarter of this year have been notably weak, giving rise to heightened uncertainty about the track the economy is on.”
- Clearly, what appeared to be a relatively certain course for the Fed to move short-term rates higher in 2015 is now in some doubt.
- The decline in the yield on the 10-Year Treasury Note That continued last week, as the yield on the 10-Year closed at 1.87%, continuing in the same range of the last couple of weeks.
The Week Ahead
- EU Consumer Confidence Flash estimate (European Commission)
- EU and U.S. PMI Flash Estimates (Markit)
- U.S., New Home Sales (Census, Dept of Commerce, HUD)
- U.S., Durable Goods Orders (Census, Dept of Commerce)