Fed officials jawboned about reducing the balance sheet while interest rates fell sharply again early in the week. That somehow convinced the Fed that the markets will be just fine if they continue hiking and whittling down the massive balance sheet. Sure…
Listen to what the politicians say, watch what they do, but keep your eye on the balls called sales and earnings. If sales slump and earnings get trampled is when you may get to see how low the markets can go. Prepare now so that your odds of having regret get reduced. The party is over when the music stops for whatever reason.
Geopolitical tensions from North Korea to Russia, along with the U.K.’s decision to have snap elections drove down interest rates (along with a “short-squeeze”). Fed talk didn’t do it. At least for now, the Fed is being ignored.
Stocks moved sharply higher Monday and pulled back mid-week before climbing higher on Thursday. Around 11:00 am PST on Friday, April 21 we saw that the markets were back in negative territory. Keep your hands and arms inside the vehicle.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of April 21, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
Consumer Prices Dipped 0.3% in March, Up 2.4% Over Last Year… Excluding food and energy, prices fell 0.1% last month and rose 2.0% for the year.
What it means – Prices fell nearly across the board, with apparel and communications (cell phone plans) falling hard. Auto prices also dropped, reflecting slower sales. Home prices and medical costs bucked the trend, but only moved higher by 0.1%.
The big story is that the weakness doesn’t match soaring consumer confidence. If people feel so good, why aren’t they spending more? That would drive up prices. Our research provides an answer (an aging population doesn’t spend as much, no matter how the people feel), and even a guide for what lies ahead. Without a major economic change (think trillion-dollar stimulus), look for prices to remain soft.
This should keep interest rates low, and could slow the rate at which the Fed raises interest rates.
Retail Sales Dropped 0.2% in March, and February Spending Revised Down from Up 0.1% to Down 0.3%… Consumers spent less on everything from building supplies to furniture. Autos notched their third straight month of falling sales.
What it means – As with consumer prices, the retail sales figures show that we can feel good yet keep our wallets closed. Even excluding autos and fuel, sales only managed to inch up 0.1%.
With this news added in, the Atlanta Fed now estimates first-quarter GDP to grow by a mere 0.5%, and that’s annualized. If correct, it means the economy expanded by a tiny 0.125% in the first quarter, a time when the markets were abuzz with confidence.
This could set up a very difficult second quarter for the markets as investors lower their spending and earnings forecasts for the rest of the year.
Housing Starts Fell 6.8% in March, Still Up More Than 8% Over Last Year… Both single-family and multi-family starts dropped off last month.
What it means – Housing starts are noisy, bouncing around every month. After a very mild February, the weather turned ugly for part of March. This could have been the culprit.
Optimists will point to rising building permits, but the strength was concentrated in the multi-family sector, which creates much less employment than single-family homebuilding. The overall picture remains the same – housing is solid for the moment, but not exploding.
Existing Home Sales Rebound in March, Up 4.4%... After falling 3.9% in February, existing home sales made up the lost ground.
What it means – As the spring selling season got underway, existing home sales were able to punch through their four-month average of about 5.55 million units annualized, reaching 5.71 million last month. Just like housing starts, the back-and-forth in sales clearly doesn’t show that real estate is breaking out, but the numbers remain solid.
Except for energy states and some high-priced condo markets, it still feels like a seller’s market in most of the nation.
Industrial Production Increased 0.5% in March as Capacity Utilization Grew 0.4% to 76.1%... The growth reflects strong demand for utilities during bad weather. The other two sectors of this report, mining and manufacturing, both suffered.
What it means – The subtitle of this blurb could be “driving off a cliff,” since most of the slowdown occurred in the auto sector. We’ve spent the last couple of years coaxing more buyers into new cars through increased incentives and riskier lending, now it looks like we’ve reached the end of the line.
By last December, we sold cars at an annual pace of more than 18 million. We’ve dropped back to 16.5 million, and could go lower. Falling sales will ripple through the economy, affecting hours worked, wages, and even financing deals on Wall Street.
Venezuelan Government Seizes GM Factory… The company denounced the move and said it would challenge the government in domestic and international courts.
What it means – Welcome to the club. Recently Ford wrote off its entire project in Venezuela, taking an $800 million hit. The Maduro government seized a Kimberly-Clark factory, and Coca-Cola shuttered operations because it can’t get enough raw materials to make soda.
GM’s protesting a bit too much over a plant that operated at minimal capacity, since they aren’t selling many cars. With prices jumping 800% last year and set to increase more than 1,000% this year, who can afford a new set of wheels?
Shetland Islands Work Toward Independence… There is a growing separation movement on the small network of islands that belong to Scotland.
What it means – They have tiny ponies and big oil wells. The provenance of the Shetlands might be disputed, but the recent governance isn’t. They’re part of Scotland, and therefore part of the U.K. But with the Brexit vote, the “U” in U.K. is in question, and has a lot of people thinking, “If they can do it, why can’t we?” It’s a fair point. If Western democracy calls for self-governance, then at what point can a subgroup choose to separate from a larger entity?
Of course, it’s interesting that only geographically rich areas are noisily calling for freedom. When economic fortunes turn, they might choose to rejoin the herd.
Frog Slime Might Kill Flu Virus… Emory researchers claim to have used the slime of a Southern Indian frog to kill strains of the flu.
What it means – The scientists found that four compounds found in the slime killed the flu, but only one of them wasn’t toxic to humans as well. So, you might cure your flu by licking a frog, but it might kill you in other ways. For now, it’s best to stick with bed rest and plenty of fluids.
University of Tennessee Offers Course on the Life of Dolly Parton… The honors course provides a history of Appalachia through the entertainer’s biography.
What it means – Most graduates of the university are Tennessee natives. Choosing the life of one of their own, particularly someone so prominent and well-received, to highlight the history of a downtrodden region, seems right. The move allows the course to move beyond the dry statistics of poverty and suffering, putting faces and names with the area’s timeline. Besides, they get to listen to “Jolene” and other Dolly hits in class. I wonder if they’ll take a field trip to Dollywood?
Next Week – The last week of April brings a couple of reports on housing as well as durable goods, and finishes off with the first estimate of first-quarter U.S. GDP growth.
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