Economic Outlook: At The Moment, It’s All About The Dollar.
- Nobel economist, Ronald Coase, said, “Torture the data, and it will confess to anything.” We may be seeing a bit of such torture in recent GDP forecast revisions.
- First quarter and 2015 U.S. growth forecasts seem to be getting cut in every corner. Since the first of the month, we’ve seen cuts in the estimates by Barclays, JP Morgan Chase, and Macroeconomic Advisers. Numbers are now down from 2014’s final growth rates.
- We do not believe these estimated reductions mean the U.S. economy is in some sort of trouble, just that it may not be able to live up to some expectations that had gotten pretty high.
- Most of the data releases that have hit in the last two weeks, while positive, have fallen below economists’ predictions. This is true most recently of the Michigan Consumer Confidence report as well as the Retail Sales Number for February.
- We know, however, that the Fed watches the Jobs Numbers more than any other metric. Those numbers are not disappointing. It was just Friday a week ago that we had the report of 295,000 new jobs. This is not a metric suggestive of an economy with any serious problem of slowing. It certainly seems to confirm that the softening in the oil patch has not impacted the national jobs economy.
- Foreign economies seem to definitely be showing growth out of their previous state in the doldrums. The ECB released a forecast that real GDP in the Euro-zone will grow 1.5% this year, 1.9% in 2016, and 2.1% in 2017. That 2017 forecast represents the first time since the end of 2007 that ECB economists have raised the forecast above 2.0%.
Equities Outlook: Bad Is Good; Or Are You Superstitious?
- Last week ended on Friday the 13th, second month in a row that has happened. Unlike last year, there now seems to be a pattern developing – if the dollar is strengthening, our equity market seems to take a hit. If the dollar is faltering, our market rallies. Should we expect some sort of magical connection?
- The S&P 500 Index slipped a little more than 0.5% on Friday. Most analysts pointed the finger at the strong dollar, which gained on Friday, and its effect on raw material and industrial companies and their ability to export outside the U.S. For the week, the U.S. stock index declined 0.9% and stands pretty much at break-even for 2015.
- Friday’s market move was almost an exact reversal of the pattern on Thursday, when the Retail Sales data pointed to some economic slowing and the possibility that the Fed will go slow in raising rates. The S&P 500 jumped 1.3% on Thursday with the “bad” news.
- On Thursday, the two measures (S&P 500 and the U.S. Dollar) again moved opposite one another, but in the reverse directions (principally because the dollar also fell on the weak U.S. Retail Sales number we mentioned above). We were not seeing this sort of negative correlation in 2014.
- Initial hikes by the Fed in interest rates should not necessarily be feared by equity investors. Strategas Research released a summary of S&P 500 performance after initial interest rate hikes in March 1983, January 1987, March 1988, February 1994, June 1999, and June 2004. Following an initial interest rate hike, the S&P 500 was up, on average, +3.7%, 3 months later, and up +7.7%, 6 months later.
- Certainly, we should acknowledge that the strong dollar indeed has an impact on earnings for the big U.S. multi-national companies in the S&P 500. The dollar stands at a 12-year high versus the Euro and a 7-year high versus the Japanese Yen.
- The combination of lower oil prices and the strong dollar has impacted estimates for the combined S&P 500 earnings enough that current forecasts call for combined earnings to fall modestly in 2015 on a year-over-year basis.
- This is quite a shift from where we were in late 2014, when analysts were calling for a 5-6% year-over-year gain in 2015. Many times, when analysts react to conditions and change their estimates, they overshoot in the other direction. We’ll have to see if the effect of the strong dollar on U.S. companies proves to be as dramatic as these adjustments might suggest.
- That said, the strong dollar is likely fueling some of the increased flow of funds to foreign equity markets. With your pricey dollar, you can buy an increased quantity of foreign stock earnings, and those earnings are generally getting stronger. Though it has not garnered much press, Japan’s equity market is up 10.0% year-to-date, when measured in Japanese Yen. Even for U.S. investors, the gain is more than 8.0% year-to-date, after adjusting for currency changes.
- At the close of last week, Japan’s Topix index capped an eight-week gain and the Nikkei 225 pushed ahead 1.5% on Friday to its highest level since April of 2000. The Stoxx Europe 600 Index rose 0.6% last week and stands at its highest level since 2007.
Fixed Income Markets: One-And-Done?
- The strong dollar should take some pressure off the Federal Reserve to accelerate the pace of interest rate hikes. If the dollar slows economic growth, the Fed has fewer worries about overheating and inflation. Predicted growth rates in the U.S. economy do not particularly suggest overheated conditions. First quarter GDP growth could finish up at around a very tepid 1.0%. Admittedly, there are some one-off factors affecting this first quarter number.
- An increased number of observers use the phrase “one-and-done” to talk about the likely Fed hike scenario. With the strong dollar, perhaps the Fed only raises the funds rate one time and then leaves it alone for awhile.
- Maybe the bond market is buying it. The interest rate on the 10-year U.S. Treasury Note ended last week at 2.11% on Friday. This was a modest pullback in yield from the previous week’s 2.23% and a reversal in what has generally been an upward movement in yield that has continued without significant interruption this year.
The Week Ahead
- U.S., Industrial Production (Federal Reserve Board of Governors)
- U.S., Housing Starts (Census, Dept of Commerce, HUD)
- U.S., FOMC Meeting Announcement and Yellen Press Conference