When it comes to Wall Street, sometimes good news is bad news. On Friday the Labor Department reported a stronger than expected jobs number and US Stocks and Treasury Bonds sold off sharply on fears that the Federal Reserve’s rate increases will come sooner (June) rather than later (4th quarter). At the same time the US dollar rose sharply. While we believe that the FED normalizing rates is not a bad thing in the long run; we never underestimate the short term gyrations that can occur. June 2013 saw a sharp selloff after the FED announcement of beginning to taper the stimulus. Yet stocks rose through year end and bonds rose most of 2014 despite the actual taper taking place. The bottom line is that inflation is decreasing rather than increasing and is well below the FED’s target. Wage growth over the past year remains weak. While Janet Yellen may not want to appear too dovish to a congress where some representatives want to gain more control over the FED, I believe that the FED will look at all the data and if prices are stalling and wage gains remain where they are, the FED will likely delay (at the last minute) a June increase.
Another contributing factor to this week’s decline is the fact that 4th quarter earnings reports have pretty much ended and the market often takes a breather focusing more on the economic numbers.
Other factors to consider going forward:
- This year’s winter, while not likely to produce a negative gross domestic product like last year, will likely produce much lower growth than the past three quarters.
- The soaring dollar will slow growth by making it harder to export. At the same time the strengthening dollar will make the US attractive to foreign investors which should help stock prices.
- The collapse in oil prices will continue to cause layoffs in the energy industry. This may mute strong gains in other sectors of the economy.
These things do not mean that the economic expansion is over; just that growth will likely be below where it was the past three quarters.
A lot of economic news came out this week. In particular:
- China cut its overnight interest rate from 5% to 4.5%. It also cut its benchmark lending and deposit rates by .25%.
- India cut its key lending rate from 7.75% to 7.5% citing low inflation and weakness in some sectors of the economy.
- The Labor Department reported:
- First time jobless claims increased in the prior week by 7,000 to 320,000 worse than forecast and the highest since last May. Also, the four week moving average of first time claims rose 10,250 to 304,750.
- The US added 295,000 jobs in February and the unemployment rate dropped from 5.7% to 5.5%.
- Average hourly earnings rose 3 cents in February. Year over year wages have only increased 2%, below the 3% pace that has been common before the financial crisis.
- Calcbench reported that capital investment rose 15% in the fourth quarter to a five year high of $166BN.
- The Federal Reserve reported that all 31 of the biggest banks passed their stress tests. This means they have adequate capital reserves to withstand a severe recession. They FED may move next week to allow the banks to increase dividends or buy back shares.
- The Commerce Department reported
- The trade deficit shrank to $41.75BN in January. December’s deficit was revised down from $46.56BN to $45.60BN. Exports fell 2.9% from December while imports fell 3.9%. The decline in imports was attributed to falling oil prices and the port slowdown in Los Angeles. It’s important to note that December’s non-petroleum imports were $172.27BN, the highest level on record. January’s non-petroleum imports were $168.99BN.
- New orders for US factory goods fell in January by 0.2%, the sixth straight monthly decline. A gain had been forecast for January. December factory orders declined by 3.5%.
- Non-defense durable goods orders, however, rose by 0.5% in January after a 0.6% increase in December, a sign of corporate capital spending.
- The Institute for Supply Management reported that their non-manufacturing purchasing managers index was 56.9 in February better than the 56.7 in January. This index measures the services sector of the economy which are expanding at a faster rate.
