LSA Connect

(+) Durable goods orders were stronger than expected overall for February, at a gain of +5.7% versus an expected +3.9% increase.  The ex-transportation component, however, lost ground of -0.5% for the month, which lagged the forecasted gain of +0.6%.  Finally, the ‘core’ capital goods group fell -2.7% versus a consensus drop of -1.1%.  In the underlying numbers, several metrics pared back from especially strong results in January, such as machinery orders.  On the positive side, shipments for non-defense-related capital goods ex-aircraft (related to the GDP input number) rose +1.9%, which beat expectations by about one-half percent.  A somewhat convoluted report, but the trend so far in 2013 has been positive.

(+) Personal income for February gained +1.1%, which was a positive surprise versus the +0.8% expected, and included a +0.6% gain in wage/salary income.  Along with the higher income, the savings rate also rose, as did consumer spending—up +0.7%, which was a tenth of a percentage point of a positive surprise.  The consumer response didn’t fall off as some expected due to the higher payroll tax rate this year; however, the primary driver for consumer buying was higher gasoline prices, which tends to be the less satisfying kind of spending for most people.  The PCE price index, which is used in GDP statistics and differs a bit in the calculation method from CPI, rose +0.39% on the month, which was below the forecasted +0.5% figure.  The core version of the same inflation index rose nominally, about 6 hundredths of a percent, just a shade below expected.  The difference between the headline and core, naturally, was the higher price of gasoline during the month. Continue reading →

With the recent market rally there has been a lot of talk about the sustainability of this run up.  It is important to always take a step back and keep things in perspective.  When building an investment strategy, Continue reading →

It was an especially busy week of the month for housing-related data.

(-) Existing home sales rose +0.8% for the month of February, which was a bit light compared to the +1.6% gain expected (however, a revision upward for the prior month partially tempered the disappointment).  Single-family sales were down -0.2%, while condo sales gained +8.8%.  However, this group is much smaller and quite volatile month-to-month—as is all housing data in the short-term, at least to some extent.  The ‘months supply’ of homes on the market rose a bit, by +0.4 months to 4.7 months, although this remains dramatically below levels of recent years.

(0) Housing starts were a bit disappointing for February, with a gain of +0.8% versus an expected +2.8%.  However, the lighter Feb. numbers were offset by a Jan. revision upward—so net-net, everything was in line with expectations.  Single-family starts were up +0.5%, while multi-family gained +1.4%.  The Jan. revision for multi-family was largely a change from a very negative to a less negative number, which gives a sense of the breakdown where building is continuing to occur, albeit choppy from month-to-month.  Over the trailing year, however, total housing starts are up +27.7%, with single-family up +31.5%—both of which are very strong annual results and reflect the continued improvement in the housing space.

(+) Building permits for February are also significantly higher, up +4.6% versus a consensus gain of +2.3%.  Single-family and multi-family rose +2.7% and +8.1%, respectively.  Again, this is in keeping with the recovery trend. Continue reading →

The Fed Open Market Committee completed their March two-day meeting with no significant changes to their policy or communication to the outside world. However, they did acknowledge an improvement in the nation’s growth prospects (to ‘moderate’), as noted by economic data and survey results in the first few months of this year. (Although not noted in their announcement specifically, the Federal Reserve’s prediction for GDP growth is a central tendency of 2.3-2.8% in 2013, 2.9-3.4% in 2014, and 2.9-3.7% in 2015, as well as unemployment levels in those same years of 7.3-7.5%, 6.7-7.0% and 6.0-6.5%, respectively.)

Nevertheless, the FOMC voted for economic easing to continue for the foreseeable future—which has taken the form of Treasury and mortgage bond purchases in upwards of $85 billion/month. Accordingly, they have continued to reference their policy threshold of a 6.5% unemployment rate, coupled with 1-2 year forward-looking inflation of no greater than 2.5% and ‘well-anchored’ longer-term inflation expectations, as a guideline for a possible exit point.

Esther George, the Kansas City Fed President, was the lone dissenting vote on the grounds that such continued accommodation has the potential for increasing ‘financial imbalances’ including higher inflation expectations. The longer this policy continues, we see more and more debate surrounding potential inflation. While there are market strategists and economists that are convinced that ongoing monetary stimulus has no other outcome than high inflation, as this excess money makes its way downward into the economy and into consumer prices and wages; other academics argue that the ‘hole’ created during the Great Recession was so deep and wide that we are still essentially digging ourselves back to level ground—and banks aren’t helping by keeping lending low (so the money ‘multiplier’ effect isn’t as strong as it normally is). We often think that the biggest threats are those not on the front page of the paper, so perhaps inflation will become a greater concern when it is off the front page and forgotten about yet again.

The big news of the week from an economic front was arguably the government sequester that took hold as promised on March 1. Interestingly, this strategy has traditionally been considered as an option so unpalatable to politicians that it would force policymakers towards a better way. That ‘better way’ was never agreed upon, so we’re left with an aftermath of cuts. Cuts are incremental in nature, peaking in later 2013 and 2014, and are enough to shave our GDP by ½ a percentage point this year. This wouldn’t be the end of the world in most cases, but with our growth so low anyway, ½ percent is significant. But it’s not too late. Seeing Congress postponing this retroactively wouldn’t be out of the question, and would be entirely within their trend of recent behavior.

Abroad, the Italians made their voices known in a protest vote that led to more gridlock. The success of a populist, anti-establishment/anti-austerity former comedian did not help the situation. Until this gets unraveled, it means several things to the investment world (no surprises here): markets fall—both equities and bonds, as we see yields rise relative to their European counterparts and ‘risk-free’ options like German debt. Now, if the parties can agree to come together to form a functional government (it is unlikely not to happen, at least at some point), markets may respond more favorable when better ‘certainty’ is available. Continue reading →