3 Stories in the global economy that should not go un-noticed
As many expected, the sequestration deadline came and went on March 1, demonstrating Washington’s unwillingness to compromise on either side of the issue. With no deal in sight, President Obama formally ordered the start of $85 billion in government spending cuts Friday evening. Markets shrugged off the sequestration deadline, perhaps trusting that lawmakers will pull themselves together before the full weight of the cuts are felt. Although spending cuts have been ordered, it will take time for the gears of government to turn, and the major effects may not be felt until early April, when the first furloughs begin.
Fed Chairman Ben Bernanke made several speeches last week with a clear message: The Fed will keep long-term interest rates low to encourage economic growth. Despite some dissension in the ranks, the Fed will continue its program of loose monetary policy while closely monitoring financial markets to curb inflation risks.
While Friday’s sequestration deadline weighed on investor nerves, markets still ended the week in the black, with the S&P 500 gaining 0.17%, the Dow gaining 0.64%, and the Nasdaq gaining 0.25%.
Here are the 3 stories this week that rose above the noise:
U.S. Oil and Gas Boom Takes Many by Surprise
U.S. oil production has increased rapidly in recent years, growing by 40 percent since 2008 to reach its highest level in two decades. The sharp increase in production is largely the result of hydraulic fracking, which allows the extraction of once unreachable oil and gas reserves.
The U.S. may become the world’s largest producer of oil by 2020 if the oil production boom continues, according to the International Energy Agency. The rapid rise in oil and natural gas production has helped the U.S. manufacturing sector become more competitive globally, as firms look to “in-source” to take advantage of an abundance of cheaper energy sources, among other factors.
Service Industries in U.S. Grow at Fastest Pace in a Year
The Institute of Supply Management (ISM) Non-Manufacturing Index for February rose to its highest level in a year with a reading of 56 versus 55.2 in January (readings above 50 signal expansion, while reading below 50 signal contraction). Although not as widely followed as the ISM Manufacturing Index, this article from Bloomberg.com notes that service industries make up approximately 90 percent of the U.S. economy.
The continued strength in non-manufacturing activity indicated by the ISM survey provides additional evidence that the rebounding housing market and generally improved consumer balance sheets are helping support consumer spending and offsetting the headwinds of the payroll tax increase and rising gasoline prices.
More Stocks, Fewer Bonds
A recent piece in Barron’s discusses findings from their recent survey of 40 of the largest wealth-management businesses. In aggregate, wealth managers are increasing their equity allocation and reducing their bond allocation, with the driving force being the fear that interest rates are heading higher.
On the equity side, investment managers have increased their exposure to foreign equities with larger allocations given to Europe, Japan and emerging markets. Two-thirds of the firms surveyed reduced overall fixed-income holdings from a year ago, with lower weights seen in the Treasury and high-grade corporate spaces. To make up for yield, managers are using high yield, emerging market debt, and alternative investments.
