From Rodrigo Serrano of Rational Capitalist Speculator,
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
+ The U.S. economy clearly remains on the recovery track:
- On Wednesday, we had our first clue that job creation in February was robust, with ADP reporting that 198,000 private sector jobs were created; the advance was broad based across industries. On Thursday, investors received news that the 4-week average of jobless claims fell to its lowest level of the recovery. Finally on Friday, the Bureau of Labor Statistics announced in its payrolls report that 236,000 jobs were generated (see graph below), much better than the consensus estimate of 171,000; additionally, the unemployment rate fell 0.2% to 7.7% versus a consensus estimate of 7.8%.
- The Institute of Supply Management reported that the service sector, which accounts for close to 80% of the economy according to the Bureau of Economic Analysis, grew at a vigorous pace (Composite Index = 56.0). Even better, within the report, new orders spiked 3.8 points to 58.2 (50 demarcates expansion from contraction); meanwhile, the backlogs subindex surged 5.5 points to a solid 55.0, its highest level in 21 months. Orders are piling up (positive backlogs) and new orders are coming in at a quickening pace. These leading indicators exhibit that the bulk of the economy is slated to grow over the coming months.
- While factory orders for January showed a contraction of 2.0%, the result was heavily skewed by the transportation sector. Beneath the headline number, we see renewed growth in business investment. Core capital-goods orders, which encompass those of non-defense and excluding aircraft, were revised upwards from 6.3% in last week’s Advance Durable Goods report to 7.2%.
- The recovery is set to continue as we have entered a period of “Nirvana for housing.” Improved debt to income metrics, pointing to household deleveraging in its late innings; increased residential investment and housing starts, which are usually the best leading indicators for the economy; the end of the drag from state and local government layoffs; loosening household credit; and an accommodative Fed are strong tailwinds that will support economic growth in over the next few years. You can add rising home prices to that list.
- According to the Fed’s Flow of Funds Accounts report, households’ real net worth is about 8.5% below pre-recession highs; however, if net worth rises at the same rate it did last year we could see a complete recovery from losses sustained during the “Great Recession” by year-end.
+ Further signs surface that the global economy is stabilizing. In Europe, region-wide retail sales surprised to the upside in January, climbing 1.2% versus analysts’ forecasts of a 0.3% rise. This result cancelled out a 0.8% decline in December. Furthermore in China, exports are beginning to increase signaling increased demand from its trading partners. Meanwhile in Japan, the Nikkei equity index is up roughly 40% over the past 3.5 months. A weaker Yen is proving the difference as exporters become more competitive in global markets.
- A clear divergence between Germany and the rest of the periphery countries in Europe (see chart below) highlights the risk of the euro chipping away at European unity (French unemployment just hit its highest level since 1999; youth unemployment is at a record high). The downturn in the region has intensified. An increasing number of investors believe a strong Euro, due to other central banks easing to high heaven, is an impetus (Eurozone exports plunged at the fastest rate in almost 4 years during Q4).
Meanwhile, Fitch downgrades Italy’s credit rating due to a strong showing from Beppe Grillo’s 5-Star Movement, increasing political risk to the Eurozone. “The inconclusive results of the Italian parliamentary elections on February 24-25 make it unlikely that a stable new government can be formed in the next few weeks,” Fitch said. While Germany may be showing strength, is it sustainable?: check out both January new factory orders and car sales. Meanwhile, Brussel’s prescription for record unemployment?: raise taxes (brilliant!)
- China institues its harshest property measures yet, leading to a 9.2% plunge in the Shanghai Property Index. Uncontrolled advances in real estate prices are a symptom of short-sighted rampant monetary easing by major central banks worldwide. China’s getting irritated by Japan’s Shinzo’s Abenomics. Currency wars and beggar-thy-neighbor policies greatly increase the prospect for armed conflict.
- Preliminary negative signs of the increase in payroll taxes are slowly sprouting behind the incessant news of new all-time highs for the DJIA. The International Council of Shopping Centers reported that in February US chain store sales rose 1.7%, below the organization’s guidance of 2 to 2.5%. Meanwhile, the Beige Book released this week also noted slowing retail sales through late February. Deteriorating sales trends will lead to an excess of inventories (keep an eye on the inventories to sales ratio) and ultimately slowing production. On the job front, the Challenger job-cut report indicates that layoff announcements for February rose to a level seen only twice over the past 16 months. Moreover, Friday’s news of a falling unemployment rate is likely transitory; the sequester will result in increased unemployment. Another warning shot comes from Gallup’s Consumer Confidence survey, which has notably deteriorated since the sequester began.
- The president of the Dallas Fed states the obvious to those who see the forest for the trees. Monetary policy is clearly not a panacea for economic growth. Despite unprecedented amounts of monetary stimulus, lack of credit demand (an idiosyncrasy of a balance-sheet recession) makes transmission of monetary policy to the general economy very difficult. The only credit demand we’re seeing is that related to student loan debt.