Judging by the way the stock market has rebounded in response to some decidedly mixed economic indicators today, investors appear to have returned to the ‘bad news is good news’ mentality — hoping that softness in the economy will defer the Fed’s decision to normalize monetary policy.
By Peter Martin
Thursday, March 12, 2015
The Dow Jones surged 198 points or 1.13% by early afternoon in New York, closely trailed by the broader S&P 500 Index, which gained 1.00% to 2060.6. The gains came despite a heavy fall in Intel ($INTC), a low-weighted component of the Dow Jones, which slumped more than 4% after the company trimmed its revenue projections for the first quarter, citing soft demand for PCs. A knock-on effect of this news was a 2% drop in Microsoft ($MSFT).
Weakness in the day’s economic data came from retails sales and business inventories, while better-than-expected jobless claims provided some counterbalance.
Business inventories were unchanged in January, the same result as for December (representing a downward-revision, as December was originally reported as a 0.1% rise). Business sales were down a sharp 1.0% in December and this unfavourable trend picked up momentum in January with a 2.0% slide in sales. This pushes the inventory-to-sales ratio up to a bloated 1.35 (compared with 1.33 in December and 1.31 in November). Though total inventories are stable currently, the increasing ratio relative to sales does not bode well for future production levels, which has negative implications for hiring. The actions that businesses might take to combat the risk of unwanted builds in inventories include lowering prices and cutting orders for goods that are not selling.
February’s retails sales provide no encouragement, particularly for the auto industry. Overall sales declined 0.6%, undershooting expectations by some margin (the consensus estimate was for a 0.3% rise), though the drop was just 0.1% excluding autos. Some of the blame can perhaps be apportioned to bad weather in February (though it is arguable how much of a surprise bad weather in February really is), but the poor result of retail spend will nevertheless dent estimates for how the economy is performing in the first quarter.
Initial jobless claims shrank 36,000 to 289,000 last week, coming in far better than expected, and this improves the four-week moving average to 302,250 from the prior 306,000. The labor market is looking healthy, but it is not the only metric the Fed will be using to gauge whether the time is right to introduce a rate hike.
As the last FOMC statement said, its assessment will consider ‘a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.’ The jobs market is rosy, but inflation pressures are non-existent. In fact, deflation pressures might be worth worrying about, based on today’s release of import prices, which showed a 9.4% drop year-on-year in February — and that was in spite of a steep rise in petroleum prices during the month. The massive strength we’ve seen in the US dollar since January will have a further downward effect on import prices; against this backdrop, Friday’s producer price data will make for interesting reading.
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