Economic Notes for the Week of April 9th

The closely-watched ISM manufacturing index number came in slightly better than expected, at a one-point increase from 52.4 to 53.4 for March.  The production and employment components rose, while new orders fell back a bit.  Improvement here is tempered, but steady.

The ISM non-manufacturing index, which was released a few days later, declined a bit from 57.3 to 56.0, which was slightly larger than anticipated.  Components were mixed as new orders and general business activity were down, but employment improved and remains robust under this particular index’s measure.

Factory orders increased by +1.3% for February, which was close to expectations.  The growth number was tempered a bit by an upward revision in ‘core’ (non-defense, non-aircraft) orders in January.

The construction spending report was quite a bit worse than forecast, down -1.1% for the month of February in addition to previous months being revised down.  This was made worse by the fact that the consensus view called for a small increase.  Continued bad news from construction isn’t entirely surprising anymore, but these demonstrate the poor state of affairs the U.S. housing market is in.  Unlike many other industries, housing can take a long time to bounce back.  When you add elements of high capital cost, illiquidity (at least relative to other assets), tightened credit/lower leverage possibilities, a lot of headwinds are in the way.  But these trends never last forever.  Based on demographics and replacement needs, it would be difficult for us to build fewer single-family homes than we’re building right now.

Motor vehicle sales, on the other hand, were sharply higher as all three big U.S. automakers reported strong March sales, and reports from foreign manufacturers Nissan, Hyundai and Toyota were also notably higher (for Nissan and Hyundai, March represented the best sales month in their respective histories).  In the U.S., gains were +12.7% for the quarter—and represented the best one quarter performance since early 2008.

The ADP Employment Measure of private employment was up +209,000 in March, which was a few thousand higher than what was expected and the two previous months were revised upward.  Manufacturing employment and construction employment were both higher, while services were also up, but at a slower pace than previously.  Interestingly, a recent economic research piece we came across noted the surprising lack of predictive accuracy of the ADP report with the BLS payroll reports later in the week over time… the average difference in estimate has been 60,000 jobs historically.  Nonetheless, markets watch the ADP number closely, since they need to watch something during the middle of the week.

Initial jobless claims came in at 357,000, which was a few thousand higher than forecast but below the revised number from the previous week—not considered extreme.  Continuing claims were 3,338,000, which was a bit below the forecasted amount of 3,350,000.

The employment situation report released on Friday was a different story and quite a bit weaker than expected, with nonfarm payrolls were gained +120,000 versus a much higher expected number of +205,000.  It seemed a drop in ‘temporary employment’ was a major factor, as were lower numbers from retail employment.  The unemployment rate fell from 8.3% down to 8.2%, but this was largely a workforce size issue, affecting the pool of measured unemployed.  (At the same time, the ‘U-6’ rate fell from 14.9% to 14.5%, and average hourly earnings was up.)

The FOMC minutes from March meeting were released last week and ended up being a negative for the market—albeit for strange reasons.  It caught many by surprise that monetary easing options weren’t discussed at a deeper or more substantive level, although the idea for scenario analysis was discussed and pushed off until the late April meeting.  Market participants were disappointed at the lack of interest in more stimulus here, which could have been seen as a shot in the arm for markets in the short-term.  However, if we see additional labor market stagnation and/or signs of decelerating economic growth around or below the +2.0% GDP level, we will likely see additional stimulus in one form or other.

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In a Good Friday holiday-shortened week, equities were off a bit.  Early in the week, investors were discouraged again by no further cues from the Federal Reserve hinting about additional monetary stimulus.  Again, this is puzzling to us for a different reason, as we take a lesser need for stimulus as a positive sign of stronger and better self-sustaining economic fundamentals.  It is important to remember how shortsighted markets are (as in days and weeks, or seconds and fractions of seconds these days, as opposed to months and years).

Risk assets fell mid-week as a bond auction in Spain resulted in slightly higher interest rates (albeit by only 0.20% to 5.6%, compared to the peak of 6.7% hit last fall) suggested the effects of earlier European funding operations might be waning.  Spain is now the epicenter (again) of current concerns, now that Greek debt restructurings seem to be under control, as are Portugal’s (helped by its small size) and Italy’s reform and austerity program is being accepted better than anticipated.  Markets are off this morning based on Friday’s poor job growth news, a modest drop that’s been expected all weekend.

In the U.S., consumer staples and healthcare led on the week on the S&P, while financials and materials suffered the most.  U.S. issues led foreign, as EAFE names were brought down by the Spanish debt auction just mentioned.  At the same time, emerging markets performed decently, with strong bouncebacks from India, China and South Korea.

Bonds had a mixed week, with Treasuries losing the least ground, while corporates and foreign debt lost over one percent in some cases with rising yields abroad.

Commodities were up just slightly as gasoline rose, but copper and silver corrected.  Wheat and cotton were down the most of any commodity as planting intention and stocks reports were released.

Please join us for our Monthly Advisor Meeting this Thursday, April 12, at 9:00 AM Pacific/12:00 PM Eastern Time to discuss recent market and portfolio performance as well as other anecdotes concerning the current environment.  As always, we’ll have an open question and answer session or two as well.  An e-mail invitation will follow today—hope to ‘see’ you there.

Have a good week.

Karl Schroeder, RFC, CSA, AACEP

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, Schroder’s, 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.