A week filled with news was led by the Trump
administration's efforts to raise tariffs on China and included
buckling in web stocks on Facebook's enormous privacy beach. These
events pushed out a steady-as-she-goes FOMC meeting and even a last
minute extension of the debt limit. What we'll concentrate on this
report is the week's economic data, headlined by a durable goods report
that brings up the question of overheating and by a run of housing
data topped by what could tentatively be described as a surge in home
prices.
The economy
Significant
strength is the verdict for the latest durable goods report and with
it, significant growth is now the tangible outlook for this year's
factory sector. The blue columns of the graph track monthly order
totals for durable goods which came in at $247.7 billion in February
for a jump of 3.1 percent compared with January. The green line tracks
shipments of durables which totaled $249.7 billion for a 0.9 percent
increase which is very sizable for this measure. The slopes in the
graph are very convincing and show no suggestion of plateauing,
confirming the enormous strength that has been posted over the last
year by regional and private factory surveys. Unfilled orders, which
have been showing less strength, improved with a 0.2 percent gain.
Turning to inventories of durables, they rose a healthy 0.4 percent
but, relative to shipments, they are not keeping pace as the
inventory-to-shipments ratio fell one notch to 1.64. The dip in this
reading points to the need for restocking which should be a special
plus for factory payrolls.
Durables,
which are discretionary in nature, get special attention since rising
demand for these goods hints at rising demand for goods and services in
general. And among durables, capital goods get the most attention as
demand for these, from machinery to computers, points to increasing
fixed investment as businesses put new equipment in place to meet what
they expect will be rising demand ahead. And very convincing strength
comes from core capital goods (nondefense ex-aircraft) where
year-on-year growth, as tracked by the blue line of the graph, moved up
nearly 2 percentage points to 8.0 percent. Monthly growth for this
reading far surpassed top estimates with a 1.8 percent gain to $67.8
billion while related shipments, which are direct inputs into GDP
business investment, rose an outsized 1.4 percent. Looking at product
groups that contribute to the capital goods component, orders for
primary metals surged a monthly 2.7 percent in a gain that may reflect,
based on reports from regional and private surveys, rising prices for
steel and aluminum. It's worth noting that these prices were already
climbing ahead of possible steel and aluminum tarrifs announced earlier
this month. Fabrication orders rose 0.8 percent in February with
machinery, which is at the very heart of the capital-goods group, rising
1.6 percent.
Less
strength, however, comes from the week's sales data out of the housing
sector. Existing home sales did rise in February but followed
lackluster sales in January and December. Home sales can be very
volatile month-to-month -- especially during the weather effects of
winter -- which puts the focus on 3-month averages as tracked in the
graph. The blue line of existing sales, at an annualized rate of 4.890
million for February, has been flat for nearly 2 years in what has been
a major disappointment for the nation's Realtors. New home sales, the
green line, have been doing better but have run out of gas in recent
months, slipping in February to a 3-month rate of 631,000 in what is
not the best news for home builders. Lack of homes for sale has been
perhaps the biggest reason for the lack of sales punch, especially in
the resale market where supply is at a very thin 3.4 months relative to
sales. And not helping matters is an ongoing rise in mortgage rates
which are averaging about 4.70 percent for 30-year fixed loans which is
up about 25 basis points from this time last year. Another factor
holding down sales is an increase underway in prices, up a year-on-year
5.9 percent for existing homes to a median $241,000 and up 9.7 percent
for new homes to a median $326,800.
Home
prices, that is FHFA house price data, were perhaps the week's biggest
surprise, shooting up to 259.28 in data for January for a far
stronger-than-expected 0.8 percent monthly gain and a 7.3 percent
year-on-year increase which is the best in 3-1/2 years. This index
covers single-family transactions using data from Fannie Mae and
Freddie Mac. Federal Reserve Chair Jerome Powell, in his first FOMC
press conference at midweek, said there's currently no immediate risk
of excess value in the housing market though FHFA's data do hint at
acceleration. If there are questions of a possible price bubble they're
centered in the western states with the Mountain region in this dataset
at a year-on-year 10.0 percent and the Pacific region at 9.4 percent.
And three other regions are 7 percent and over: South Atlantic up 7.8
percent, New England up 7.1 percent, and the East North Central at 7.0
percent. If it wasn't for the moderation underway in underlying sales,
rising prices in the housing market would likely be considered a
warning of unsustainable economic growth.
Also
released in the week were early indications on March from Markit's
manufacturing and services reports. Let's look first at manufacturing
where the purchasing managers index came in at 55.7 which, as tracked
in the blue line, extends a rising slope that parallels in direction
the more closely watched ISM survey. Strength so far this month
includes orders, production and also employment but price pressures, in
an echo of the housing data, are perhaps the most telling result. A
number of respondents are citing higher prices for metals and,
according to the report, increased charges by suppliers amid strong
demand for raw materials. At the same time, selling prices are rising
at the strongest pace in just over 6-1/2 years.
Markit's
service sample is reporting less strength, moderating to an index of
54.1 with this curve, though pointing higher, underperforming the ISM's
non-manufacturing measure. Despite the slowing, orders and employment
remain strong. And price pressures are also evident. Markit's results
are likely to firm expectations for yet another very strong reading in
the ISM manufacturing report though they may temper expectations for
ISM's non-manufacturing data, both of which will be posted at the
beginning of next month.
Whether
we are talking about manufacturing or services or housing or even
prices, all of these take a backseat to the nation's most important set
of economic data: the monthly employment report. And the the report for
March looks to be strong once again based on initial jobless claims
which, in the sample week for the monthly report, remained low and very
favorable. Initial claims in the March 17 week inched 3,000 higher to
229,000 with the 4-week average up slightly to 223,750. A comparison
with the February 17 sample week of the prior employment report, as
highlighted in the graph, shows no significant change. Continuing
claims, in lagging data for the March 10 week, fell 57,000 to 1.828
million and a new multi-decade low. Employers are holding onto their
employees like never before which is an indication that demand for
labor is unusually strong.
Markets: Stocks move to the minus column
The
stock market took a beating, opening the week with a 1.4 percent drop
for the Dow on news that a third-party firm amassed Facebook data
without user permission which was followed on Thursday by a 2.9 percent
plunge after President Trump, who earlier this month announced tariffs
on primary metals, moved to impose heavy tariffs specifically targeted
at Chinese imports. Friday wasn't much better with the Dow dropping
another 1.8 percent. The declines wipe away this year's year-to-date
gains, at least for the Dow and S&P 500 which now show respective
losses of 4.8 percent and 3.2 percent. But sellers didn't move their
money into Treasuries, which were mostly steady in the week, though they
may have been buying commodities based on the big 5.8 percent weekly
gain for oil and 3.0 percent gain for gold. The dollar, however, wasn't
in demand, falling 0.8 percent in the week for a year-to-date decline
of 3.0 percent which points to increasing price acceleration for
imports.
Markets at a Glance | Year-End | Week Ended | Week Ended | Year-To-Date | Weekly |
2017 | 16-Mar-18 | 23-Mar-18 | Change | Change | |
DJIA | 24,719.22 | 24,946.51 | 23,533.20 | -4.8% | -5.7% |
S&P 500 | 2,673.61 | 2,752.01 | 2,588.26 | -3.2% | -6.0% |
Nasdaq Composite | 6,903.39 | 7,481.99 | 6,992.67 | 1.3% | -6.5% |
Crude Oil, WTI ($/barrel) | $60.15 | $62.27 | $65.91 | 9.6% | 5.8% |
Gold (COMEX) ($/ounce) | $1,305.50 | $1,313.50 | $1,352.30 | 3.6% | 3.0% |
Fed Funds Target | 1.25 to 1.50% | 1.25 to 1.50% | 1.50 to 1.75% | 25 bp | 25 bp |
2-Year Treasury Yield | 1.89% | 2.30% | 2.27% | 38 bp | −3 bp |
10-Year Treasury Yield | 2.41% | 2.85% | 2.81% | 40 bp | −4 bp |
Dollar Index | 92.29 | 90.22 | 89.48 | -3.0% | -0.8% |
The bottom line
The week's durables data point to continued
increases in factory payrolls, which have already been very impressive,
and also to an increasing capital-goods contribution to business
investment, specifically equipment investment that already represented
about 1/4 of the fourth quarter's 2.5 percent GDP growth rate. Though
inflation wasn't directly in the week's spotlight, factory strength
does highlight the risk of rising pressures as perhaps do home prices.
Yet we'll give Jerome Powell, who chaired his first FOMC press
conference in the week, the last say, that increases underway in
inflation are right now no more than moderate.
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