Economic Outlook: Here and There
- The U.S. had a strong Jobs Report last Friday. It is pretty hard not to call the U.S. employment situation pretty good. Payroll employment rose by 295,000 and unemployment rate dropped to 5.5%.
- The latest releases on U.S. manufacturing were divergent. PMI’s Manufacturing Index posted above expectations at 55.1. ISM’s Manufacturing Index came in at 52.9, a decrease from last month. This is a bit unusual to see these go in different directions, so we will continue to watch it. The effects of the dock workers strike on the West Coast could be causing some blips in the data.
- The story on Services was more consistent with both services registering strong momentum. PMI Services posted at 57.1 and ISM Services ended at 56.9.
- U.S. consumers are enjoying increased purchasing power as a result of higher incomes. For the three months ending with January, real disposable income posted an increase of 5.3%, one of the best numbers in the past two years. The increase in wages and salaries are helping consumer spending move up. Spending is up 3.4% on a year-over-year basis.
- The consumer savings rate picked up to a level of 5.5% in the recent data, so consumers are saving some of the increased income and improving their balance sheets.
- One of our favorite sources of economic data and interpretation is Austin-based Strategas. Strategas revised their forecast for Euro-zone 2015 GDP up to 2.0%, a significant change from the previous call of 1.0% growth. If Europe gets anywhere close to this, it is likely to provide strong momentum for their financial markets.
- The latest post for the Euro-zone’s PMI Manufacturing Index posted in the growth column at 51, according to Markit.
- What was notable was strength in the peripheral economies. Ireland led the pack at 57.5 (a high for the past 15 years) and lowly Spain (at 54.2) was second. The Netherlands came in at 52.2 and Italy at 51.9. France (47.6) remains in the negative column and has some ground to make up.
- German Retail Sales were a surprise on the upside in January increasing 2.9% and are up a strong 5.3% year-over-year.
- India and China both cut their posted interest rates last week in a bid to provide economic stimulus.
Equities Outlook: Reason to Worry?
- The U.S. stock market got clipped on Friday after a strong jobs report (+295,000) left investors feeling more convinced that a Fed rate hike might come sooner rather than later. Reason to worry?
- While it has been volatile so far in 2015, the S&P 500 remains in positive territory following Friday’s sell-off and is out-performing the bond market. To clear one’s head on these questions, it usually pays to look at earnings.
- We are now pretty much complete with the reporting of Q4 earnings by S&P 500 companies so it’s time to draw some conclusions. We now have results from 96% of S&P 500 companies and on the surface, you could call the tally “mixed” compared to a year ago.
- Of the companies that have reported, 69% exceeded industry analysts’ earnings estimates by an average of 4.4%, with an earnings increase of 6.8%. That’s generally weaker than the same period last year (we were just above 70%).
- The story on the revenue side is similar. 58% have beaten analysts’ Q4 forecasts by an average of 1.6%, just weaker than last year’s comparable results of 60%. Do these comparisons suggest things are slowing up or losing momentum?
- What’s interesting is to look at the numbers without the effect of depressed energy prices on the Energy sector of the S&P 500. Without Energy included, year-over-year revenue growth comes in at +4.6% up from less than +2%. Earnings growth increased to +10.6% from +6.8%.
- Our take: the underlying trends continue to appear quite healthy.
- Fund flows are beginning to reflect investor recognition that the Euro-zone has begun to get unstuck from its economic mire. ETFs with Euro-zone exposure have received $19.3 billion in net inflows during the first two months of 2015.
- David Rosenberg provided a great summation on the Euro-zone last week in his Friday market comments: “The Euro area has currency tailwinds, monetary stimulus tailwinds, earnings revisions tailwinds and growth upgrades tailwinds…” Even home prices in Spain posted their first annual increase since 2007.
Fixed Income Markets: A Success Even Before Its Official Start?
- The QE plan for the Euro-zone announced by Mario Draghi starts officially today, as the ECB starts buying German and Italian government bonds. Based on the interest rate differentials, it might be fair to call the plan a success even before its official start.
- The differential in U.S. interest rates compared to Europe is increasingly noticeable. The U.S. Treasury yield is more than 175 basis points above the German 10-year. The appeal of our bonds makes the U.S. dollar firmer relative to foreign currencies. The Euro was below $1.10 last week, a ratio not seen in more than a decade.
- The interest rate on the 10-year U.S. Treasury Note ended last week at 2.23% on Friday. This was a strong bounce up in yield from the brief decline of the previous week and a resumption of a 4-week trend of upward movement in yield that had continued uninterrupted. Last week’s closing yield was 2.0%.
- Overall, the recently released Beige Book indicates modestly positive growth in the U.S. Our call is that there is not likely a rush by the Fed to raise rates. The odds are that the Fed will implement the first increase in rates some time later this year, but subsequent increases will not be close behind.
The Week Ahead
- U.S., NFIB Small Business Optimism Index
- U.S., Retail Sales (Census)
- European Union, Industrial Production (Eurostat)
- U.S., University of Michigan Consumer Sentiment