Weekly Economic Update

(-) The second estimate of 4th quarter GDP was a disappointment, although many watchers expected as much—the initial estimate of +3.2% was revised down to +2.4% (a tenth lower than the expected revision).  The majority of the difference came from lower personal consumption expenditures (up +2.6% instead of the +2.9% expected), net exports and inventories—in roughly equal amounts.  On the positive side, business fixed investment gained a half-percent over the first measure.  There is one more remaining revision next month, but the +2.5% growth rate is right in line with trend over the past year; and is neither great nor terrible—it’s in line with positive, but tempered growth we’ve come to expect.  Similarly, the PCE price index, which is the GDP inflation component, was revised upward a few ticks to +1.3%, but that remains at +1.2% pace over the past year and is quite tempered as well.

For the current 1st quarter 2014, GDP estimates are running in a similar range of 1.8-3.2% or so (round if off to 2-3% if you like), with the inventory ‘payback’ component being the tipping point.  But we have some time for these to change.  Extreme winter weather impacts are likely, the amount of which is to be determined, but could be upwards of several tenths of a percent.

(0) Durable goods orders for January fell -1.0%, which was slightly better than the -1.7% expected drop.  The headline number was affected by a drop in civilian aircraft orders (Boeing specifically), which fell -20% and can be choppy; however, defense orders gained +23%.  Core capital goods orders rose +1.7% (vs. consensus expectations of a -0.2% drop), helped by gains in fabricated metal and computers/electronics—both over +5%.  Core shipments fell by almost a percent, but remained a few tenths of a percent better than expected.  While some December numbers were revised downward, this wasn’t a terrible report considering the negative expectations surrounding the winter season.  The shipments part may lower GDP for the first quarter a bit.

(+) The Chicago PMI for February came in better than expected, up a few ticks from 59.6 last month to 59.8—far better than the forecasted 56.4.  Despite the strong expansionary headline result, the underlying components were mixed, with new orders and production down a point or two, while employment rose by 10 points (which was quite dramatic).

(+) The FHFA house price index of conforming mortgaged-financed homes gained +0.8% for December, beating the median forecast of +0.3%.  Gains were widespread, including the West South Central (i.e. Texas) region that rose +2%, while the Mid-Atlantic and New England regions lost a half-percent.  The trailing 12-month gain is +7.7%.

(+) Similarly, the Case-Shiller home price index also rose +0.8% for December, compared to an expected +0.6% rise.  The biggest winners on the month were Miami, Detroit and San Francisco, which all gained just over a percent, while 19 of the 20 indexed cities (exception being Cleveland) gained ground.  Over the past year, the index is up +13.4%, which is substantial.

(-) Pending home sales for January rose +0.1%, but fell short of the +1.8% forecasted increase, but at least ended a half-year of declining results.  December’s growth was also revised upward by 3%, but remained sharply negative.

(+) New home sales for January rose +9.6% to 468k, which sharply outperformed the forecasted decline of -3.4%; additionally, the December number was revised upward a bit (by +3%, cutting the month’s decline in half).  Sales were widespread here as well, with the exception of the Midwest region, so the break in a few negative housing reports was welcome.  Again, housing statistics are depressed during the winter season, so it will require early spring results to show more consistency.

(+) The final University of Michigan consumer sentiment survey for February rose a bit from the initial and expected final 81.2 to 81.6.  Consumer assessments of the present situation improved by several points, while future expectations declined.  Inflation expectations also softened a bit over the year-ahead view (still at +3.2%), while the longer-term expectations were just under 3%, on par with the long-term range.

(-) The Conference Board’s consumer confidence survey for February came in at 78.1, which was lower than January’s 80.7 and the 80.0 forecast.  Consumer assessments of the present situation improved by several points, while future expectations interestingly declined somewhat.  The respondents reporting that jobs were ‘plentiful’ versus ‘hard to get’ improved by just over a point, on par with other data noting improvement on a still-low base.  Overall sentiment remained good relative to the improving trend seen over the post-recession era.

(-/0) Initial jobless claims for the Feb. 22 ending week rose a bit to 348k, from 334k the prior week and above the 335k estimate.  Continuing claims for the Feb. 15 week rose also, to 2,964k, from the previous weeks’ 2,956k (expectations called for 2,985k).

Question of the Week

What’s going on with Bitcoin?

Since they’re not a specific asset class in our investment process, we don’t often mention currencies specifically (especially synthetic currencies) but Bitcoin was the recipient of some unusual news this week.  The news was specifically focused on the Mt. Gox Bitcoin exchange in Tokyo, which appeared to be hacked and lost 750,000 ‘coins’ worth upwards of a half billion dollars and has declared bankruptcy as a result.  It’s unclear what happened to the coins, which may have either been stolen or somehow electronically voided, although more investigation remains.

For those that haven’t followed the story of Bitcoins closely, the idea came together in 2009 as part of an online-based digital currency designed to work as a secure method of electronic entity-to-entity payment without the involvement of banks, credit card companies or other third parties.  What’s the point?  Aside from avoiding the 2-3% charged by processors for typical electronic transactions, it’s presumably designed for global portability, safety (in that it isn’t carried physical cash) and secrecy.  Where accepted, it offers the obvious benefits one would have from paying with cash, including illicit dealings (a primary criticism) and tax avoidance.  For the pessimistic out there who believe the U.S. dollar, euro, pound, franc and yen are headed down the tubes, and aren’t quite ready to get on board with the renminbi quite yet, this offers another non-country specific option for a potential store of value—much like precious metals have provided historically.  Of course, like gold, it can be and has been speculated on and has a value all its own, which has fluctuated somewhat wildly versus developed market currencies, from a value of 1 Bitcoin = $1,100 USD in December to around $550 USD more recently.  On Friday, the coins fell by 10% in value, but this isn’t unprecedented—several days over the past year saw fluctuations in the +/- 20% range (!).  Just when folks thought the Turkish lira was volatile…

We don’t see this is an immediate threat to the global safe haven currencies, but the concept has experienced some popularity.  Undoubtedly, online security will need to be a primary consideration, as it is with all digital information.  In light of the theft last week, Vietnam joined the list of countries banning its use (China did so last December); as the technology of the currency is likely beyond the reach of some/many world regulators.  Some economists/currency strategists are beginning to track its value, so it could be worth watching in years to come.  On the other hand, a few of the less optimistic in the financial world assign it a fair value of zero, which obviously gives the story a very different ending.

Period ending 2/28/2014

1 Week (%)

YTD (%)

DJIA

1.42

-1.07

S&P 500

1.30

0.96

Russell 2000

1.62

1.81

MSCI-EAFE

0.65

1.31

MSCI-EM

0.75

-3.62

BarCap U.S. Aggregate

0.48

2.02

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2013

0.07

0.38

1.75

3.04

3.96

2/21/2014

0.05

0.33

1.56

2.73

3.69

2/28/2014

0.05

0.33

1.51

2.66

3.59

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