March 1, 2018

Stocks are mixed this morning (Dow +31 pts; SPX -.17%). It seems traders like Fed Chair Powell’s tone as he reports to a US Senate committee. Utilities (+.6%), transports (+.8%) and energy (+.6%) are leading way. On the other hand, technology, gold miners, pharmaceuticals and retailers are in the red. The VIX Index is up around 20 again following yesterday’s rout. The dollar is a bit stronger and commodities are mostly weaker. WTI crude oil is trading below $61/barrel. That’s a 1-month low for oil, and yet most energy stocks are in the green today. Bonds are slightly higher in price, lower in yield. The 5-year Treasury yield is trading at 2.63% and the 10-year is back down to 2.85%. Remember, equities are taking their cue from the 10-year. 

The recent correction and stock market choppiness since then may be characterized as a slow-down scare. The economy and corporate earnings are very strong, but any sign of weakness will put traders on edge. Citigroup’s Economic Surprise Index topped out 85 as the year began, but it has fallen to 33 since then. That still suggests economic momentum, but at a slower rate. Real estate is a bit of a concern for traders because we’ve had a couple of soft home sales reports in the last week. The bottom line is that with earnings season in the rear-view mirror, investors will be paying a lot of attention to economic data.  

January’s Personal Income & Spending report suggested a modest rise in wages and a slowdown in consumer spending. Incomes rose 3.8% y/y and if you strip out inflation it’s more like 2.3%. Spending slowed because consumers held off on automobile purchases. Auto sales were unexpectedly weak in February. Honda reported total sales fell 5%; both GM & Ford sales fell 6.9% from year-ago levels. The report’s two measures of inflation, PCE Deflator and Core PCE Deflator, held steady with December levels exactly as economists expected. So let’s all calm down about inflation. It is not exploding higher. The savings rate, which has been falling for two years now, increased to 3.2%. Stepping away from this monthly report, the downtrend in savings is a bit of a concern. Wage growth just hasn’t kept pace with consumer spending. But the good news is that the gap is closing. Wages are beginning to pick up because the job market is tight. 

ISM’s manufacturing index surged to 60.8 in February from 59.1 in the prior month. The gain is so pronounced that it looks like an aberration. If it is to be believed, it means factories/utilities/mines are expanding at their fastest pace in this business cycle. The survey suggests hiring, export orders and total order backlogs accelerated during the month. Barron’s notes that this private research survey is picking up strength not revealed in the government’s official Factory Orders report—which is flat. A third source of data, Markit Economics’ US Manufacturing PMI, shows a healthy pace of expansion but not as strong as the ISM report.    


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