Wednesday, March 19, 2014

Perspectives from Above the Noise – Week of March 17, 2014


U.S. markets were choppy last week with the S&P 500 and Dow each sliding over two percent. Global and geopolitical concerns trumped modest improvement in U.S. economic data. Evidence of advances in the labor market was provided by weekly jobless claims that declined by 9,000 to 315,000, a three-month low. Economists had expected an increase in jobless claims and with this week’s data showing a third consecutive decline in continuing claims there is mounting evidence that the labor market is rebounding from weather-influenced weakness over the past three months. Retail sales in the U.S. also increased in February by 0.3%, the first increase in three months and above consensus expectations. There was a broad-based rebound in demand with nine out of 13 categories showing monthly gains and restaurant sales, an important indicator for discretionary spending, rising by 0.3%. Despite last week’s slide, U.S. stocks have generally been quite resilient, after a very strong February rebound, even as many of the world’s other leading markets have come under growing pressure.

For the week, the S&P 500 dropped -1.97%, the Dow lost -2.35%, and the MSCI EAFE (developed international) fell -3.06%.

Here are the 3 stories this week that rose above the noise:

Industrial Production Bounces Back in February

U.S. industrial production rebounded in February and grew at its fastest pace in six months, signaling the U.S. economy is beginning to break out of its recent weather-induced slump. Consensus expectations were for a 0.2 percent rise, but February’s industrial production grew by a sizeable margin over expectations to reach 0.6 percent month-over-month growth, the first monthly gain since November.

Nearly half of the increase came from growth in automotive production, which grew by 4.6 percent in February following a sharp decline of 5.1 percent in January. February’s rebound in industrial production, coupled with moderate improvements in manufacturing and labor data, is providing optimism that economic growth will re-accelerate in the coming months.

Consumer Prices Little Changed as U.S. Inflation Contained

Despite increases in a select number of commodities so far in 2014, the overall cost of living in the U.S. was little changed in February. The consumer price index (CPI) increased only 0.1 percent last month, matching the advance in January. Excluding volatile food and energy, the so-called core measure also climbed only 0.1 percent from January and was up 1.6 percent over the past 12 months, the same as the previous month.

Lower inflation readings complicate policy for Federal Reserve officials as they meet this week. Central bankers raised concerns about too-low inflation several times in their last gathering. As a result, Fed officials have said they will probably hold the bank’s target interest rate near zero for “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent.

Japan as the Crisis Next Time

In a blog posting for Reuters, Anatole Kaletsky summarizes the bear case for Japan and how it could have a significant impact on the global economy and financial markets. The author was a one-time supporter of Japanese Prime Minister Shinzo Abe’s aggressive economic program commonly called Abenomics. However, two key pieces of Abe’s original plan have been largely abandoned (structural reforms) or reversed (fiscal stimulus). Of particular concern is a looming jump in the consumption tax from 5 percent to 8 percent set to take effect on April 1. The Japanese equity market also seems to have lost momentum and we will be watching for signs of a technical breakdown in the coming weeks which would lend evidence that the bearish fundamental case detailed in the article is playing out.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.