Monthly Dollars & Sense Newsletter

Here is the e-version of our popular and informative monthly newsletter, Dollars & Sense. It briefly discusses topics we believe to be important this month.

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March Madness is upon us—not just the NCAA tournament, but also a period in which the stock market posted a record high, consumers are feeling confident, oil prices are falling, inflation is rising, and the Federal Reserve (Fed) has hiked rates. A strong employment picture is also part of the mix. Across the pond, Parliament has cleared the way for Brexit to proceed, and upcoming elections in The Netherlands and France have people on edge.

Any one of these data points could trigger investor angst, but so far, they haven't. Volatility remains fairly subdued, and investors, for the most part, keep buying, although they slacked off a little just prior to the Fed's March 15 meeting—or maybe it had something to do with the blizzard that blanketed the East Coast.

On February 14, 2017, the Dow Jones Industrial Average (DJIA) was 20,504.41, and the Standard & Poor's 500 (S&P) was at 2,337.58. Oil was priced at $53.71 per barrel, and gold was $1,225.40 per ounce. The dollar was $1.05 versus the euro, and the yield on the 10-year Treasury Note (10-Year) was 2.47%. On March 15, 2017, the DJIA had climbed to 20,950.10, and the S&P closed at 2,385.26. Oil dropped to $48.86, and gold declined to $1,200.70. The dollar fell to $1.07 against the euro, and the 10-Year yielded 2.50%.


EMPLOYMENT

Initial claims for unemployment reached their lowest level since 1973: 223,000 versus consensus estimates of 244,000.[1] Although claims have ticked up slightly since then, most will agree that with more people working, and not just in the 'gig' economy, the outlook for the economy is positive.

But, the dynamics of employment are changing, according to John Mauldin, who notes that at least 80% of lost manufacturing jobs were because of automation, not because companies sought lower labor costs in Mexico and China. He foresees the Age of Transformation changing the face of employment and job creation. For example, the automobile industry is being affected by disruption—the concepts of sharing and automated driving—which could lower the total number of vehicles on the road, with serious implications for truck drivers. It also could reduce accidents, meaning insurance costs could fall and fewer insurance agents may be required. Although similar displacements have occurred throughout history, technology is making it happen faster, but at the same time, is also creating new jobs. Small businesses will continue to lead the pack in terms of creating new jobs—so long as they succeed: statistics show that 80% of new ones fail, or don't succeed in their current form, within the first five years .[2]

The ADP Employment Change report showed 298,000 new private-sector jobs were created in February, outpacing the consensus estimate of 180,000, and the figure for January was revised upward to 261,000 from 246,000.[3] The Employment Situation Report, released on March 10, was almost as sanguine, showing nonfarm payrolls rising to 235,000 in February, surpassing consensus estimates of 188,000, and the unemployment rate dropping to 4.7%. But the gold nugget was the increase in hourly earnings: up 2.8% year over year, giving the Fed plenty of ammo to hike the fed funds rate.[4]


DOLLAR/FEDERAL RESERVE

In February, the Fed governors held different views on a rate hike, and the futures market apparently concurred, giving it a 25% to 30% probability.[5] The Fed minutes, revealed on February 22, cited uncertainty over fiscal policies as a stumbling block, yet hinted of a hike, leading one analyst to comment that the Fed's messaging was rather erratic.[6] But barely a week later, odds for a rate hike had risen to between 50% and 80%, as New York Fed President William Dudley opined that the case for tightening "has become a lot more compelling," and San Francisco Fed President didn't "see any need to delay."[7] As expectations rose that the Fed would follow through, the stock market continued to climb, as did the dollar.[8] One analyst went so far as to predict that the Fed feasibly could plug in four increases this year.[9] That may be a stretch, as Fed Chair Yellen's March 15 comments accompanying the 25 basis point hike mentioned the possibility of rate hikes "every three or four months."[10] So now we know.


OIL

Oil prices ranged from a high of $54.05 on February 27 to a low of $47.72 on March 14. At the beginning of the period, the U.S. Energy Information Administration (EIA) announced a weekly increase of 9.5 million barrels, its highest weekly rise since 1982, versus expectations of just 2.9 million barrels. This translated to a 518.1 million stockpile. The next week, the EIA reported supplies rose by 600,000 barrels, pushing up prices to $54.94.[11],[12] A Reuters survey of OPEC compliance showed it to be in the 90% range, although US drillers added five additional rigs.[13] A week later, the count rose by an additional seven rigs (for both oil and natural gas), to a total of 756,[14] and not surprisingly, oil prices declined to $52.54 as the American Petroleum Institute (API) reported another build of 11.6 million barrels.[15] Although the API's figure was higher than the EIA's 8.2 million barrel climb, the effect was the same: oil declined to $50.28, its lowest price since December.[16] And it continued its descent, closing below $50 on March 9 (with one analyst predicting a $40 price before year-end), and touching $47.72 on March 14 before rallying a bit. All of this prompted Saudi energy officials to warn that the US shouldn't plan on further OPEC production cuts to offset output from the US's shale production.[17]

Although on one hand, low oil prices please consumers at the pump, on the other, they are a challenge to producers. This reminds us of Harry Truman's quip: "Give me a one-handed economist! All my economists say, 'on one hand ... on the other."[18]


GOLD

Gold prices ranged from $1,251.40 per ounce on February 23 to $1,202.60 on March 14, before rallying. Most analysts cited strong employment and the Fed's impending rate hike as the reason for the drop in gold prices. As interest rates rise, the dollar strengthens, which makes gold (priced in dollars) more expensive for purchasers using other currencies.[19] "We shall know in the next few days whether $1,200 will be broken more decisively," said Edward Meir, an independent commodity consultant at INTL FCStone, in a recent note. "In this regard, we think a lot will ride on what the Federal Reserve will say in its Wednesday policy statement."[20]

Generally speaking, investors hold gold in a portfolio as a hedge against inflation, and it is considered to be a "crisis commodity" during periods of geopolitical uncertainty. Investors also hold gold when the value of stocks and bonds are declining. So, the fact that gold has declined may in essence be a good thing, reflecting investors' optimism that inflation is fairly tame, the global landscape is somewhat calm, and the stock and bond markets are relatively stable.[21]


ECONOMIC DATA

With but a few exceptions, business data were positive this period. The February Philadelphia Fed Index rose 43.3%, versus consensus estimates of 25.0%. New orders rose from 38.0% to 38.6%, signifying that manufacturing is healthy in the Philadelphia region.[22] The advanced report for durable orders showed a rise of 1.8% versus forecast of 2.0%, buoyed by a rise in transportation orders. If transportation were excluded, durable orders declined .2%, underscoring somewhat lax business spending at the beginning of the year, and contradicting the optimism in survey data.[23] But, factory orders rose 1.2%, buoyed by the final durable orders increase of 2.0%, which analysts may rely on to improve their first-quarter GDP forecast.[24]

The Chicago Purchasing Managers Index (PMI) posted a 57.4 reading in February, versus expectations of 53.0, with prices paid hitting a two-and-a-half-year high.[25] It was followed by an uptick in the Institute of Supply Managers Index (ISMI) to 57.7, outpacing expectations of 56.1, and its sixth consecutive reading above 50.0, which separates expansion from contraction. The reading was also the highest since August 2014, signaling manufacturers' optimistic business prospects, and corresponding to a 4.3% annualized increase in GDP.[26] The Institute of Supply Managers Service Index (ISM) rose to 57.6, slightly above consensus of 56.7, and its 86th consecutive month above 50, which, again, divides between expansion and contraction. [27]

Leading Economic Indicators (LEI) also rose in January, to 0.6%, with the yield spread, initial claims, and building permits making positive contributions.[28] The second estimate for fourth-quarter GDP growth was a lackluster 1.9%, on an annualized basis, compared to consensus estimates of 2.1%.[29] But the Producer Price Index (PPI) showed an increase of .3%, indicating inflation is rising, reminding us of Truman's aforementioned quip. Although higher prices mean producers can raise them, on the other hand, consumers will have to pay them.[30]

Consumer-related data were generally positive. Existing home sales rose by 3.3%, beating estimates, and marking their strongest reading since February 2007.[31] New home sales were up by 3.7% in January, although less than forecast, with the lower end of the market dropping to 44%, versus 53% in January 2016.[32] Additionally, the Case Schiller Index, another indicator of the strength of the housing market, rose 5.6% in January.[33] The skunk at the garden party was January housing starts: -2.6%, to 1,246,000, but with a modest upward revision to December's figure.[34]

Both consumer sentiment and consumer confidence posted positive readings, 96.3 and 114.8, respectively.[35],[36] These data signaling optimism were supported by a .4% rise in personal income and a .02% uptick in personal spending.[37] Consumer credit expanded by $8.8 Billion, versus a $17 Billion consensus forecast, which could take the wind out of analysts' sails who are counting on higher first-quarter GDP growth.[38]


STOCK MARKET

Many weighed in on the stock market, from Chair Yellen acknowledging that fiscal policy could spur growth, to Warren Buffet averring that stocks are cheap.[39],[40] Investors heard them both, and appeared to listen to the President's speech to Congress, sending the market soaring above 21,000.[41]

But some cautioned that we need higher productivity to sustain growth over the long run, and skills-based immigration could contribute.[42] Others cite recent market softening as the boxer's "three steps and a stumble," but Sam Stovall, of CFRA Research, disagrees, opining that although a correction of 5% could occur, it probably won't be in response to the Fed's rate hike.[43] He may be on to something, as the market rose 113 points after the Fed's announcement.


BONDS

The 10-Year yield ranged from a low of 2.31%, on February 24, to a high of 2.63, on March 13, partially in response to year-over-year inflation of around 2.5%,[44] but declined to 2.38% after Treasury Secretary Mnuchin expressed preference for a strong dollar.[45] Yields climbed on the ADP report, and have hovered in the 2.50% range since.


INTERNATIONAL

News of interest from abroad this period includes the UK's moving forward with Brexit, on the back of Parliament's passing the bill to do so on March 13. But negotiations for the exit are expected to take two years, and Prime Minister Theresa May plans to begin them before month-end.[46] Not surprising, the pound fell to a low not seen since January.

Italy opted to bail out its troubled banks, with the ECB stipulating the country must raise $21 Billion to shore up its balance sheet.[47]

All eyes are on upcoming elections in The Netherlands and France, and Scotland added to the mix, rattling the independence referendum saber.[48],[49]

Meanwhile, European Central Bank President Mario Draghi is not yet quitting quantitative easing, citing that although inflation is receding, it is still low, and may even be waning.[50]


SUMMARY

A stronger economy and rising optimism appear to be driving the stock market, and higher interest rates should ultimately help savers. Although a rising tide doesn't always lift all boats, neither have we been felled by the Ides of March.




- March 2017 Dollars & Sense Data Sources


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