Interest rates moved higher, crude oil dropped sharply and stocks didn’t move much the second week of March. The markets expect a rate hike from the Fed next week, driving rates to the upper end of a range established after the November election.
Elsewhere, Friday, March 10, 2017 morning’s jobs report beat expectations of 200,000 non-farm payrolls with a strong 235,000 in additions. Wages fell short of expectations with a gain of 0.2%. I watched stocks rise in pre-market futures trading and bonds moved slightly higher with falling yields.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of March 10, 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.
The U.S. Economy Added 235,000 Jobs in February; the Unemployment Rate Remained Steady at 4.7%… The December and January jobs totals were barely adjusted.
What it means – Not too hot, not too cold. The employment figures give the Fed cover for raising rates next week, which is why the 10-year U.S. Treasury bond yield popped above 2.60% this week, and the 30-year sits near 3.20%. Interestingly, wages increased a mere 0.2%. If the economy is trending higher, why aren’t workers able to demand more pay? That’s the question that stumps economic bulls, but we might have a partial answer.
The employment numbers include the Bureau of Labor Statistics’ fudge factor, the birth/death adjustment. This month, the adjustment added 124,000 jobs to the total. Without those, the payroll numbers aren’t quite as rosy, and the weak wages make more sense.
January Factory Orders Up 1.2%, but Core Capital Goods Down 0.1%... Echoing durable goods orders, factory orders came up short of expectations after the first of the year.
What it means – Sentiment and expectations might be riding high, but actual orders aren’t showing the same enthusiasm. So far, business leaders have not put their money where their mouths are. Maybe they’re waiting to see what sort of tax goodies they get, like a 100% write off of new investment in the first year, before they commit. Or, from a cynical point of view, maybe they’re waiting for actual customers to show up before they order a bunch more stuff.
Either way, these numbers don’t point to a humdinger for first-quarter GDP growth.
Atlanta Fed’s GDPNow Model Forecasts First-Quarter Growth of 1.2%... The model first expected growth near 3%, but that fell to 2.5%, then 1.5%, and now down to 1.2%, as time passed and more economic data came in.
What it means – 2017 started with such promise! Business owners, investors, and consumers were all riding high on sentiment, but as orders proved, none of them followed through.
The Atlanta Fed’s GDPNow model has been the most accurate growth predictor over the last several years, so I’m expecting a weak number when first-quarter GDP is announced at the end of April. If the current trend is any indication, things could get even worse before then.
The GOP Released a Plan to Modify the Affordable Care Act… Republicans announced their vision of healthcare, which lowers Medicaid payments, removes the mandate to purchase care, and allows insurance companies to charge older consumers five times more than young consumers in the same market, compared with three times more under current law.
What it means – There’s more to it, of course, like rolling back all the taxes, switching subsidies to tax credits, etc., but I didn’t want to bore you with the bill’s 177 pages of detail.
The bottom line is that the new version cuts some taxes, but also cuts some benefits by allowing insurance companies to charge certain consumers more, and curbing future Medicaid payments. This might fulfill some campaign promises, but it will also give Democrats the ammunition they need to keep the fight going – Republicans are cutting care.
Unfortunately, what could get lost in the messaging is that while the current law extends care to many millions, it’s also financially unsustainable. So far, no one’s come up with a solution for covering everyone at a level that doesn’t bust their personal budget without hefty taxes that redistribute income. Welcome to life in an aging society. Despite political rhetoric, the answers don’t come easy. As President Donald Trump said on February 28, 2017, “Nobody knew health care could be so complicated,” reports CNN. Really, Mr. President?
The ECB Holds Rates Steady and Confirms Fewer Bond Purchases Starting Next Month… At a regularly scheduled meeting, ECB officials left rates unchanged and announced that they would reduce their bond buying from 80 billion euro per month to 60 billion, as they indicated in December.
What it means – Eurozone GDP grew about 1.7% last year, and now inflation sits at 2%. But as ECB President Draghi noted, energy prices drove inflation, so it’s a passing thing. With GDP stuck in the slow lane and inflation expected between 1.7% and 1.9% for the next several years, the ECB can’t afford to take its foot off the gas.
Keep in mind that these numbers include the boost that the Eurozone received as the dollar strengthened, making exports from the zone cheaper. Draghi and his cohorts are well aware that if they ease up, the euro will strengthen, causing a dip in GDP in several exporting countries. That’s a non-starter, so expect bond buying and negative rates to continue for quite some time.
U.S. Oil Inventory Reached Record Highs, While OPEC Cooperation Seemed to Waver… The U.S. recorded 528 million barrels of oil in inventory this week, even though distillates were drawn down.
What it means – The record-setting U.S. inventory, coupled with questions surrounding OPEC members sticking to their production quotas, drove the price of oil down below $49, clearly breaking the recent support level of $52.
We’ve questioned the will of OPEC members since the agreement was struck last fall, but I don’t think this is the main thing driving down oil. U.S. shale producers are setting up more rigs and recovering more oil, and the U.S. now exports the stuff. We’re the swing producer, and we’re coming on strong. I called for oil in the $40s before the $60s, and we’re there. Now we have to see how far it will drop. Since frackers can make money at $35, we’ve got room to fall.
Texas House of Representatives Develops Plan to Save Dallas Police and Firemen Pension… The plan extends the retirement age, increases the payroll contribution, raises the city’s contribution, reduces participation in a high-interest savings program, and allows future administrators to claw back previous bonus payments.
What it means – This one’s easy. The plan is $3 billion underwater, or thereabouts. To save it, they have to give people less, take back some of what they’ve paid, erase future benefit increases, and take a lot more from paychecks and taxpayers. The Dallas plan is a warning sign for cities across the nation. The only question is, will we pay attention, or simply let pensions fail one by one?
Dead Shark Found in Walmart Shopping Cart… A Walmart employee in St. Augustine, Florida, alerted authorities to the dead shark. A man in a nearby RV told officers he found it on the hood of his vehicle that morning, and moved it to the cart.
What it means – There are some things that seem to be specific to Florida. (I know, I’ve lived here for a while.) Finding a four- to five-foot dead shark on the hood of your RV – then moving it to a shopping cart! – are definitely Florida items. To show how common such odd things are, another shark was found in a driveway in nearby Vilano Beach just days before the Walmart discovery.
Jimmy Buffett Introduces Senior Community… Called Latitude Margaritaville, the Daytona Beach community is designed for aging boomers that are “growing older, but not up.”
What it means – I guess it was bound to happen. At some point, Jimmy Buffett and legions of parrot-head fans would get older and require assisted living. I can’t say I saw this coming, but what better way to escape the realities of aging than to join with other sailor-infused music fans and drink tequila?
Next Week – The week of March 13 is fairly busy on the economic front. We get reports on consumer prices, producer prices, and housing starts. Also, the Federal Reserve will meet and announce its monetary policy on Wednesday.
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