Economic Notes for the Week of March 18th

(+) The most heavily-looked at report last week, retail sales, registered a stronger-than-expected result for February, up +1.1% versus a consensus estimate of +0.5%.  The headline figure was aided by a +5.0% gain in gas station sales (in line with higher gasoline prices).  Auto sales and building materials, both cyclical and choppy month-to-month, were up +1.1% and helped the overall results.  The next level of ‘cleaned-up’ data, retail sales ex-autos, gained a still-respectable +1.0% that beat the expected +0.5%.  Lastly, the ‘core/control’ retail sales number (which excludes autos, gasoline and building materials, and represents the figure that corresponds most closely to the consumer spending segment of the quarterly GDP report) gained +0.4%, double the expected +0.2% increase.  In addition, increases were broad, with strong results in ‘general merchandise,’ food/beverage and online sales.  What this tells us is that purchasing activity continues to improve—despite some fears of slowing due to this year’s payroll tax increases.  While still fairly low, this remains a tailwind in our favor.

(0) Another newsworthy report, the Consumer Price Index, rose +0.7% for February in its headline form, which surpassed the forecasted +0.5% estimate.  Much of the gain was explained by higher gasoline prices (up 9.1% in the CPI measure).  Removing volatile food and energy, the core CPI number rose +0.2%, which happened to be right on target with forecast.  The components of apparel actually fell about 10 bps (a reversal of last month), while rents rose 25 bps.  Year-over-year, headline and core CPI figures both rose +2.0%—a level considered ‘contained’ by economists.

(0) Like CPI, the Producer Price Index came in right in line with expectations, with headline PPI gain of +0.7%.  The headline figure was driven by a +7.2% increase in the price of gasoline during the month, again, similar to CPI’s result.  Core intermediate prices gained 0.7% and the final core PPI number, which excludes food and energy, rose +0.16% in contrast to an expected +0.1% increase.  Year-over-year, core PPI rose +1.7%.

(+) Industrial production rose +0.7% in February, which outgained the expected +0.4% number.  The manufacturing sub-component ended up higher than expected (primarily due to auto production results, but machinery and computers also helped), and utilities production gained due to a cold snap during the month.  Capacity utilization also turned out slightly better than expected, at 79.6% compared to 79.4%.

(+) Business inventories for January rose more than anticipated, at +1.0% versus an expected +0.5% gain.  Retail inventory gains represented the biggest portion of the increase (at +1.5%, which was the strongest performance over a month since 2006).  Of the remaining total, manufacturing and wholesale inventory totals also rose, per noted in previous releases.  As an input to the first quarter’s GDP growth number, this represents a positive and stands in contrast to the decline seen in the fourth quarter of last year.

(0) Import prices gained +1.1% for February, versus the median forecasted figure of +0.6%.  While no surprise, the gain was petroleum-related (up +5.2%, along with higher Brent crude prices).  Removing that impact, gains in other items were flat.  This, along with CPI and PPI results, continue to tell us that inflation pressures remain at bay, from these areas at least.

(-) The Empire manufacturing index for firms in the state of New York came in at +9.2, just below expectations of a +10.0 reading.  Underlying details were a bit lower as well, with weakened results for new orders, shipments and employment.  However, forward-looking expectations for the next two quarters improved a bit.

(+) The NFIB Small Business Optimism Index rose in February to 90.8, above the anticipated 90.0 reading from analysts.  It is still quite low from an absolute level relative to history, but has shown some improvement since the large decline during 2012 in the middle of contentious election/fiscal cliff prospects.   Better results were reported in areas of economic future expectations (albeit still negative overall), future sales, planned capital spending and hiring.  While better than expected, and better than in recent months, small business owners remain quite negative about government and economic policy—which naturally translates into a reluctance to spend additional capital and bring on new employees.  However, as the economy heals and sales continue to improve, such macro concerns may begin to take a back seat and be replaced by a larger focus on the ‘micro’ side of business-building.

(-) University of Michigan Consumer Sentiment fell more than anticipated in March, down to 71.8, versus a consensus estimate of 78.0.  The bulk of the decline appeared to be focused on a worsening of consumer expectations about the future, although current condition assessments also declined a bit.  Anecdotally, the deterioration in attitude was related to ‘dysfunctional government’ issues and economic policy (we’ll take a leap and assume the sequester is the primary topic of concern here).  However, the positive takeaway from the survey is that respondent consumer spending activity doesn’t seem to be too affected by this poor attitude.

(+) Initial jobless claims for the Mar. 9 week fell more than expected, of 10k to 332k, relative to the forecasted figure of 350k.  This took the four-week moving average to 347k, also a decrease.  Continuing claims for the Mar. 2 week came in at 3,024k, which was a bit lower than the 3,090k expected.  Both series are continuing to move in a lower, positive direction.

Lastly, the JOLTs (Job Openings and Labor Turnover Survey), which is a government data release on job openings, hires and separations, showed job openings of 3.69 million for January, which was about 20k higher than forecast.  Compared to the overall unemployment rate, this is a bit high but in keeping with recession recoveries.  The ‘quit rate’ has increased in recent months, which may indicate workers are feeling better about prospects for finding other employment.

In early week European news, EU officials ended months of negotiations with Cyprus on bailout terms—€10 billion worth.  The bad news is that over half of this is being raised via proposed ‘deposit taxes’ on Cypriot bank account holders, in amounts of 6.75-9.9% (based on size of account).  This is naturally unpopular and may cause other Euro member nations and depositors to question the integrity of the newly-instituted FDIC-like EU bank deposit insurance system.  However, EU officials publicly refer to this as a ‘special case,’ complicated no less by Cyprus’ status as an off-shore tax haven of sorts (roughly a third of bank deposit assets are thought to be owned by Cypriot-based Russian companies) and very small size (0.5% of Euro area GDP), but there may be more to come.

Market Notes

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Equities continued to plug away at new highs (at least for the Dow), as results from an economic and jobs front (noted above) continued their benign trend, and were helped by positive (meaning non-negative) results from the Fed’s bank stress tests.  Several banks, including BofA, Wells Fargo, Citi and JPMorgan Chase, earned approval to re-purchase several billion dollars worth of shares, which pleased investors.  Accordingly, financials, along with energy stocks led on the week, while consumer staples and technology lagged.

Developed foreign equities outearned all other equity assets, led by Switzerland, Japan and the U.K., while emerging market stocks lost ground—China and South Korea faring the worst.  Weak industrial numbers from China caused continued concern over soft landing and forward growth prospects.

Bonds gained ground a bit, despite the rise in risk assets that often spells trouble for bond holders due to rising yields and cash flows to equities.  Long treasuries had the best week, up roughly a percent, while corporate and high yield also rose in an absolute sense.  Munis were down again this week, due to higher supply in larger states like California and New York, perhaps as well as general asset flows into equities.  Foreign developed bonds also had a decent week with poor economic news out of the U.K. especially and continued Italian election uncertainty, which drove down yields, while emerging market debt lost a few basis points in return last week, with better economic performance than the developed markets.

In real estate, mortgage REITs led the way, while residential and industrial REITs also fared well.  European and U.S. retail lagged, with negative returns.

Commodities were up about a percent on the week.  Cotton, natural gas and wheat represented the largest increases, but most commodity subgroups ended up in the positive.  However, industrial metals were flat, and several agricultural areas like livestock, soybeans and coffee fell several percent.  Gold gained a percent on the week as well, but has fallen by roughly -5% in 2013 thus far, as global geopolitical concerns have dissipated.

Gasoline corrected by a percent last week, but the increase year-to-date (+7.5% versus the -0.5% result of the DJ-UBS) has been especially noteworthy in magnitude, but not entirely unique in the seasonal timing or underlying conditions—just frustrating for drivers.  Some of this increase was due to a surge in the prices of ‘ethanol blending credits (RINS),’ a unique marketplace driven by the U.S. government’s mandate of blending a certain percentage of ‘renewable’ fuels such as corn ethanol (referred to as ‘E10’ and ‘E15,’ etc.) with traditional gasoline.  This marketplace allows producers to buy/sell ‘credits’ in order to meet requirements if they either produce too little/much (similar to carbon emission credits).  Long-story short, enter a new derivative and you get an entirely new pricing dynamic into the mix.  Perhaps this is what the government intended, but more likely, the ramifications weren’t thought out completely in advance.

Have a good week.

Karl Schroeder, RFC

Investment Advisor Representative

Schroeder Financial Services, Inc.


Sources:  FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research,  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 Serives, Inc. is a registered investment advisor.

Notes key:  (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.