Economic Notes for the Week of February 20th

Retail Sales for January, at +0.4% month-over-month, were a bit lower than expected due to a drop in auto sales (although fleet sales may have had something to do with this).  With autos removed from the measure, the figure rose to +0.7%, which ended up being a bit higher than expected.  The individual results were mixed, as sales were up for sporting goods, electronics and department stores, but declined for non-store retail and online.

Business inventories were up +0.4% for January, roughly in line with consensus and on the same trend as the previous month.  The non-auto retail number was below the government’s estimate and may result in a lower 4th Quarter GDP adjustment.

Industrial Production was flat for January, which was lower than the +0.7% increase expected and the +1.0% December monthly number—mostly affected by the utilities sector, but the manufacturing figure was helped by a strong increase in motor vehicle/parts production.  This may not be as meaningful as it looks, in that a few prior months were revised upward, making comparisons tougher.  Capacity utilization stood at 78.5%, roughly in line with consensus.

The National Association of Home Builders’ survey showed a gain in February, as in January.  The expectations for home sales were up, which was a key component in the higher score.  Housing starts were up by +1.5% for the month in January, which was slightly less than expected, but revisions for prior months improved the underlying report.  Single-family starts were a bit off, which again reinforces strength in the multi-family structure market from the past several months.  Apartment builders are experiencing a mini boom, as previous/potential homeowners appear to be choosing to (or are forced to) rent instead of buy for the time being.

The FOMC minutes from the late January meeting were released this week.  The key takeaway here was the difference in opinion among the committee’s membership as to whether further easing would be necessary—a few were ready at the time; others would need to see further deterioration in the outlook.  Interestingly, the minutes noted questions about the calendar-based guidance (aka ‘low rates through late 2014) in the format statement—feeling this additional detail was redundant and unnecessary when coupled with the published rate forecasts.

The Producer Price Index moved up by only +0.1% for January, which was below the expected consensus move of +0.4%.  The core figure was +0.4% higher, which was slightly more than expected.  The headline number was helped by lower food and energy prices for the month, while prescription drug prices, trucks and appliance price gains affected the core number.

The Consumer Price Index rose +0.2% for the month (+2.9% year-over-year), which ended up being slightly less than expected.  The core CPI number was up by the same +0.2% (but +2.3% year-over-year).  Individual components of the index were mixed, and many offset.  Owners’ equivalent rent and rent of primary residence rose along the same level as the overall index.  Overall, looking at both of these measures, inflation appears contained at present and will likely move lower than last year’s 3.0% figure.

Initial jobless claims fell to 348,000 for the February 11th week, which was about 17,000 below expected.  Continuing claims were also lower by 100,000 to 3.426 million, and also beat consensus.  The initial claims number is now at a cyclical low.

On the U.S. legislative front, congress extended the 2% payroll tax cut as well as emergency unemployment benefits through the end of 2012.  These extensions are not entirely surprising, being that we’re in an election year and the economy continues to more forward at a tempered rate—and employment growth, while better, is still not up to the government’s hoped-for level.

Interestingly, anecdotal comments from companies during this past quarter’s earnings calls have also reflected a continued strengthening of business and retail consumer environment in a variety of industries.  At the same time, managements overall have remained cognizant of risks, mostly stemming from governmental ‘policy errors’ and carryover from continued European problems.  At the same time, firms have taken advantage of issuing debt at current low rates and continue to find very compelling growth opportunities abroad, especially in the emerging market economies.  One executive summed it up relative nicely in his assessment of ‘temporary troubles’ being trumped by the magnitude of the available (emerging market) opportunity.  At the same time, executives appear to remain bullish on U.S. prospects as well—compared to conditions a year or more ago.  GDP estimates in the U.S. look to be in the 2.5-3.0% range so far.

Market Notes

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Risk assets were again the winners on the week, as investors seemed enthused by progress made in the Greek debt negotiations (a deal was finally reached late yesterday evening—which included bailout funds of 130 billion Euros and a maturity-lengthening debt swap).

Higher-volatility assets like small-cap and emerging market stocks outperformed developed market issues, but not by much.  Large-cap value outperformed growth last week—energy and info technology led while utilities and industrials underperformed.  U.S. stocks have rallied upward for six out of the past seven weeks.

With another ‘risk-on’ week in markets, bonds sold off and interest rates moved higher.  Corporates outperformed U.S government debt, which in turn outperformed foreign developed market bonds.

Commodities were positive overall, as natural gas rebounded strongly, along with strong weeks from crude oil and cocoa.  Oil has continued to rise, especially the Brent crude contract in Europe, on fears of Iranian supply disruption.  Closer to home, gasoline prices are up partially due to the crude increase, but also due to normal seasonal supply issues due to refineries preparing for the ‘summer blend’ of gas.

Enjoy the week.

Karl Schroeder, RFC, CSA, CEP

Investment Advisor Representative

Schroeder Financial Services, Inc.



Sources:  FocusPoint Solutions, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Reuters, Standard & Poor’s, U.S. Federal Reserve, Wells Capital Management, Yahoo!.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.


The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial Services, Inc. is a registered investment advisor.