President Trump’s speech early in the week helped fuel another round of record highs in the equity markets and moved the Dow Jones Industrials to an above-21,000 close for the first time, reports Money.cnn.com on March 1, 2017.
Over the past week or so, several Fed officials telegraphed an imminent rate hike. This also helped drive interest rates higher this week. The Fed will decide whether or not to change interest rate policy on March 15. Time will tell if we are going to experience Irrational Exuberance, Part 2 (shout out to former Fed Chair Alan Greenspan’s forecast in 1996).
Thanks to Dent Research, provided here is our weekly information roundup ending the week of February 24, 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.
Durable Goods Orders Up 1.8% in January, Down 0.6% Over Last Year… Excluding aircraft, the numbers reverse, with the January results down 0.2% and the annual growth up 2.4%.
What it means – Aircraft orders drive the headline number because they involve billions of dollars. But stripping out components reveals more about the economy. Excluding aircraft, things look a little better, with solid gains during the past year.
However, when we take out all transportation and defense spending to get down to business investment, things take a negative turn. Core capital goods fell 0.4% last month, and gained a measly 0.5% since last January. This throws cold water on the expectations for hot business spending in 2017, and should lower first-quarter GDP forecasts.
If we get more news along this line, then interest rates will drop a bit more and the Fed will take a pass on higher rates in March. But so far it looks like Fed officials are determined to raise rates no matter what happens.
Second Estimate of Fourth-Quarter GDP Shows 1.88% Growth… The second estimate came in almost exactly the same as the first estimate of 1.9%, but lighter than the consensus estimate of 2.1%.
What it means – We don’t normally report on second estimates or revisions to GDP because they don’t move the markets. Most investors pay attention to the first estimate and then forget about it. But this one caught my eye. Not because it will move the markets, but because it reaffirms what we’ve been saying for so long.
Yes, the economy is growing, but at a painfully slow pace. Right now, the Atlanta Fed estimates first-quarter GDP to grow 2.5%. Maybe… maybe not. As much as investors hope for breakout strength in the economy, it’s just not there.
S&P CoreLogic Case-Shiller Home Price Index Rose 5.6% in 2016… Home prices grew a bit faster at the end of last year based on a lack of supply.
What it means – We’ve been on the edge of our seats about an interest rate hike and what it means for different industries. Clearly, higher rates mean higher mortgage payments for homebuyers. So, residential real estate is a likely victim. But so far, buyers seem intent on pushing up prices to get what they want.
As I’ve noted with existing and new home sales, maybe it’s the last rush as buyers expect higher rates and want to get in under the wire, or maybe it’s just the nature of the beast.
With little supply and a lot of young people wanting to kick the renting habit, the only relief to the market is higher prices. It might sound like a tired line at this point, but I still think wage stagnation will play a major role in putting a lid on real estate in the near future. Builders have every right to be cautious.
Eurozone Inflation Up 2.0% Since February 2016… The annual inflation rate matched expectations and was the highest since December 2012.
What it means – There is less here than meets the eye, so to speak. Stripping out food, energy, and tobacco to get at core inflation, prices increased just 0.9%, and are flat over the last three months.
Given that oil sat in the upper $20s and low $30s a year ago and now costs $54 per barrel, it makes sense that this one sector is driving overall inflation higher. That said, Europe isn’t going to zero. The populations of the Continent are aging, and their currency will crack, but they still live their daily lives and produce a lot of exports. They just don’t have a lot of growth in their future, which makes investing in the Eurozone a tricky process.
Eurozone Countries Still Struggling with Bad Loans… Eight years after Greece went bankrupt the first time, 47% of its bank loans are still non-performing.
What it means – If your capital cushion is 10%, and you have 47% non-performing loans, aren’t you bankrupt? Can you make that up on volume? Geez. While the Greeks are out front on this, they aren’t alone. Portugal has 19.8% non-performing bank loans, and Spain has 16.4% bad loans. For comparison, the number is just 1.5% in the U.S. The euro will crack. It’s only a matter of time.
Congress Begins Using the Congressional Review Act (CRA) to Undo Previous Regulations and Guidance… With both houses and the White House controlled by Republicans, congress started rolling back regulations using a review process signed into law by President Clinton.
What it means – So many regulations, so little time. The CRA was meant to give congress the ability to unwind presidential executive orders and regulations that were implemented in the waning days of the previous presidency. But a loophole will allow President Trump to look at many regulations and guidance statements going back years.
There’s even a website dedicated to finding new regulations to strike down – www.redtaperollback.com. Once a regulation, order, or guidance is struck, it can’t be put back in place without legislative action. The voters might finally get a say in what happens!
New York Teamsters Local Road Carriers 707 Pension Fund Runs Out of Cash… The pension fund is dead broke, so the Pension Benefit Guaranty Corp. (PBGC) has to step in, and will pay benefits at roughly one-third of their previous level.
What it means – Teamsters Local Road Carriers 707 is a small union that covers few people, so it’s easy to dismiss. But bigger pensions are following in its footsteps, including the Central States Pension Fund, which covers more than 400,000 members.
A 2014 law requires failing pensions to have their reorganization plans approved by the U.S. Treasury. Ten funds applied in 2015 and 2016. I can’t find a single one that received approval. Instead, they were left to fail, guaranteeing lower benefits through the PBGC.
It’s a sad thing when our government won’t do the hard work required of it so that bureaucrats can sidestep any “responsibility” for failure. That’s not leadership.
Next Week – There are just a few economic reports that will be released next week, but they do include one of the biggest – the U.S. Employment Situation report on Friday. The ECB will also release a statement after its regularly scheduled meeting on Thursday.
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