The Dow Jones broke through to a new record high today, buoyed by encouraging data from the manufacturing sector and the second rate cut in three months from the Bank of China.
By Peter Martin
Monday, March 2, 2015
By early afternoon in New York, the Dow Jones was up 118 points or 0.65% at 18,251, close to the new intraday high of 18,260.31. There were strong advances for the other blue-chip benchmarks, with the S&P 500 Index climbing 0.40% to 2112.8 and a 0.68% advance for the NASDAQ 100 to 4471.7.
The market-positive news began over the weekend, with a move by the People’s Bank of China to stimulate the Chinese economy by dropping its benchmark bank lending rate by 25 basis points to 5.35%. This follows a rate cut in November. Since then economic indicators have continued to point to slowing for China’s economy, with GDP growth falling to a multi-decade low in the fourth quarter and CPI easing to a year-on-year change of 0.8% in January.
US economic data released today has mostly been positive. Markit’s manufacturing PMI came in at a healthy 54.3 for the flash reading in February, which improved to 55.1 in the final reading for the month. Not only is this up substantially from the end of January, but the strong improvement from the flash reading shows a noteworthy gain in momentum towards the end of the month. The employment component continues to look a little sluggish, but the forward-looking component of new orders was well up, a positive sign for the future.
The growth trend was not as clear in the ISM’s manufacturing index for February though, with a 52.9 level compared to 53.5 in January. New orders, employment and production were all lower, though still at expansionary levels. Exports is an area of concern, coming in below 50 for the second successive month.
Personal income continues to improve, rising 0.3% in January, the same monthly growth seen in the month prior. Unfortunately higher income is not translating into greater spending by consumers, as personal spending dropped 0.2% in January, though a 0.3% gain in price-adjusted spend shows it was lower prices that dampened the value of the spend. The softness of prices is reflected in a 0.5% drop in the PCE price index. The year-on-year change in the price index is just 0.2%, down from 0.8% in December, and now well below the Fed’s target.
Despite the low headline level of inflation, prices are mainly being dragged down by low energy prices, which are seen as being transitory, and the strength dollar in the FX market today suggests expectations for when the Fed might hike rates have not been pushed out further. GBP/USD fell 0.49% to 1.5364, while USD/JPY rose 0.46% to 120.15. It is true that prices at the less volatile ‘core’ level are more robust — the core PCE price index rose in January, for a yearly change of +1.3%, though it is still difficult to see the Fed tighten should inflation remain so deeply below target.
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