Mixed Picture Emerging For Global Economy
Stocks had best quarter in nearly a decade.
The second quarter got off to a quick start with stock markets buoyed by positive manufacturing reports the first day of April out of the U.S. and China allaying concerns, for the time being, that momentum may be slowing in two of the world’s important engines of economic growth.
U.S. manufacturing data from the Institute for Supply Management (ISM) showed a pickup in activity in March. The report also found that factory hiring gained momentum. The data helped push Treasury yields higher and partly led to fading hopes, for now, of a rate cut from the Federal Reserve later this year. Other data looking back at the first quarter, though, is mixed, and still indicates that the U.S. economy may be trending toward slower growth.
In China, the government’s official gauge of purchasing managers activity as well as the Caixin-Markit manufacturing purchasing managers index (PMI) each moved to expansion mode above 50 in March, an indication that the government’s efforts to support the economy may be having some impact. 1
The news helped push the Shanghai Shenzhen CSI 300 Index to a second-quarter opening day gain of 2.62%, following a 3.76% price decline in March. For the first three months of the year, the CSI 300 gained 28.62%, an indication of investors’ rush to take advantage of bargains in emerging markets during the early part of 2019.
In contrast to manufacturing activity in China and the U.S., activity in the eurozone deteriorated in March by 1.8 percentage points to 47.5, its lowest level since April 2013, as tracked by the IHS Markit Eurozone Manufacturing PMI. The report also found that the eurozone’s manufacturing sector experienced its biggest monthly decline in new orders since late 2012. In Germany, the region’s biggest economy, the manufacturing PMI hit its lowest point in more than six-and-a-half years. 2
Stock Rally Lost Steam in March, But April Historically a Good Month
The U.S. and China reports were a fill up of sorts for equities, fueling again the “risk on” appetite, which had taken somewhat of a pause in recent weeks. A more cautious approach by investors during March, however, wasn’t enough to keep key U.S. benchmark indexes from posting their best quarterly performance in recent years. The S&P 500 ended the first quarter up 13.07%, its best price return since the first quarter of 1998, according to S&P Dow Jones Indices. The Dow Jones Industrial Average gained 11.15%, while the Nasdaq Composite was up 16.49% for the first three months of the year.
Monthly gains for the three indexes, however, failed to keep pace with the stronger price returns made in January and February. Stocks faced pressure in recent weeks from a significant plunge in Treasury yields following the Federal Reserve’s lower forecast for U.S. economic growth in mid-March and its indications that more interest rate increases weren’t likely in 2019.
The Nasdaq rose 2.61% in March, the best performer, followed by the S&P 500 which posted a 1.79% increase. The Dow rose marginally by 0.05%. Among the poorer performers were small cap stocks. The Russell 2000 fell 2.27% in March, but still gained 14.18% in the first quarter.
For the S&P 500, its performance for the first three months (in which the index rose each month) sets up for a positive April and rest of the year based on past historical trends. On only eight other occasions has the index achieved that feat in the past 30 years, with April also being positive on six of those eight times.
In addition, in each of the years in which the index rose each month during the first quarter, the S&P 500 ended the year on a positive note and also higher than the first quarter’s index level, according to S&P Dow Jones Indices. 3
In the bond market, fears over slowing U.S. and global growth led to the 10-year Treasury note closing out the first quarter at a yield of around 2.41%. That was 28 basis points below the 2.69% yield the 10-year note ended 2018 at. The snap back in yields is even more noticeable when examined from the perspective of the past few weeks. Since the end of February, for example, the 10-year note’s yield declined by 31 basis points.
With declining yields for longer-dated government bonds in the final weeks of the first quarter leading to an inversion in the yield curve, debates over whether the bond market is, indeed, sending signals that the U.S. economy is headed for recession have again emerged. Benjamin Bimson, BCJ’s chief investment officer, took up the topic in a recent BCJ Insights piece, which examined several factors to keep an eye on, including Fed policy, market expectations for future interest rates, rising populism and the political landscape.
He concluded that, yes, a recession seems likely, but that there is not yet enough data to say it is imminent. The recent yield curve inversion could also be projecting a slowing economy and a change in Fed policy direction, all certainly a focus from BCJ’s perspective and the investment world.
“However, until the evidence proves otherwise, the market expansion is not yet over. We are likely late in the expansion, after all we are approaching a historical longest-bull market title. How long it can go will depend a lot on where the Fed moves next, geopolitical risks and tensions around the 2020 presidential election cycle,” he writes in the April 2 post. 4
Eyes on Data
As more data comes in, market participants will be examining whether or not the recent uptick in manufacturing activity can help keep the U.S. economy on solid footing. Recent data on durable goods orders (partly due to volatility in aircraft orders) and retail sales haven’t been strong. In the housing market, though, activity is picking up, thanks to those declining Treasury yields, which have helped mortgage rates dip well-below last year’s lows.
Later this month, the Bureau of Economic Analysis will release its advance estimate of gross domestic product (GDP) growth for the U.S. economy. As of early April, forecasts from the Atlanta Federal Reserve’s GDPNow model have edged above 2.0% for GDP growth, based on recent U.S. data, up from below 1.0% at the beginning of March.
While orders for durable, or long-lasting, factory goods fell in February after increasing the previous three months, the decline was less than forecast by economists. Fewer orders for aircraft and defense-related equipment and hardware led to a 1.6% decline in new orders for manufactured durable goods in February, compared to the previous month. On a positive note, so-called core orders, which exclude aircraft and defense, rose 2.6% for the first two months of the year compared to the same period a year ago, according to data from the Census Bureau. 5
Capital expenditures (CapEx), though, did show a declining trend in February from the previous month (down 0.1% as tracked for non-defense and ex-aviation orders) and warrants some attention as to whether or not CapEx has bottomed out. The ISM manufacturing report did show some bright spots, with the new orders index up 1.9 percentage points in March to 57.4. The organization noted that the manufacturing sector continues to expand as demonstrated by the PMI’s three-month rolling average, which is consistent with overall manufacturing growth projections. 6 Again, whether or not the manufacturing ISM translates to so-called “hard” data tracked by the government agencies is worth watching.
Another developing trend is in the job market. The ADP private payrolls report released on April 3 was weaker than expected, with 129,000 private sector jobs added from February to March. Given the importance of small businesses to employment and the economy, there are some concerns of slowing payroll growth for businesses with less than 50 employees.
Although that segment added 14,000 jobs in March compared to February, there was only a net 6,000 increase after factoring in the loss of 9,000 jobs in “very small” businesses of 1-19 employees. (This profile of small businesses from the U.S. Small Business Administration demonstrates their contribution to the nation’s employment and economy.)
“The job market is weakening, with employment gains slowing significantly across most industries and company sizes. Businesses are hiring cautiously as the economy is struggling with fading fiscal stimulus, the trade uncertainty, and the lagged impact of Fed tightening. If employment growth weakens much further, unemployment will begin to rise,” Mark Zandi, chief economist of Moody’s Analytics, said in the ADP release. (Moody’s Analytics collaborates with the ADP Research Institute in producing the ADP National Employment Report.) 7
Real Estate: Spring Selling Season Looking Up, Thanks to Lower Mortgage Rates
Homebuyers are taking advantage of the recent decline in mortgage rates, applying for purchase loans as well as refinancing. The Mortgage Bankers Association (MBA) reported that mortgage loan application volume rose 18.6% for the week ended March 29, compared to the previous week. Its Refinance Index was up 39.0% from the previous week, and was at its highest level since November 2016. After adjusting for seasonal factors, the MBA’s Purchase Index increased 3.0% week-over-week. Purchase applications were almost 10.0% higher than a year ago.
“There was a tremendous surge in overall applications activity, as mortgage rates fell for the fourth week in a row ─ with rates for some loan types reaching their lowest levels since January 2018,” Joel Kan, the MBA’s associate vice president of Economic and Industry Forecasting, said in a release. 8
According to Freddie Mac, 30-year fixed-rate mortgages were about 32 basis points lower than last year at this time at 4.08% for the week ending April 4. Rates had reached 4.94% in mid-November. “The benefits of the decline in mortgage rates that we’ve seen this year will continue to unfold over the next few months due to the lag from changes in mortgage rates to market sentiment and ultimately home sales,” Sam Khater, Freddie Mac’s chief economist, said in a release. 9
Another favorable development for buyers is that home prices appreciation has been decelerating since May 2018. Data for February from CoreLogic show that the CoreLogic Home Price Index increased 4.0% year-over-year, compared to 6.4% appreciation in 2018. 10
There was also a sharp rise in existing home sales in February, posting the largest month-over-month increase since December 2015. Total existing home sales rose 11.8% from January to a seasonally adjusted annual rate of 5.51 million in February, according to the National Association of Realtors (NAR). Sales are still down 1.8% compared to a year ago, but favorable conditions such as more inventory (up 3.2% from a year ago), lower mortgage rates, rising incomes and consumer confidence, are all expected to drive interest for homebuyers in the coming months.
The realtor organization cited that more inventory has contributed to a rise in consumer foot traffic as measured by opening rates of SentriLock key boxes. NAR’s SentriLock data for key access to enter a home was measurably higher for January and February compared to the second half of 2018, for example. 11
Commodities: Manufacturing Growth, Trade Deal Could Move Copper Prices Out of Recent Range
Copper prices have taken a pause in recent sessions, as the industrial metal with wide use in manufacturing and construction, has been partly pressured by the steady U.S. dollar against other global currencies. A higher dollar makes industrial metals like copper more expensive for foreign investors and non-U.S. companies. The U.S. Dollar Index, which tracks the dollar against a basket of developed country currencies, rose by 1.14% during the first quarter.
Mixed data in the global economy has also been a recent factor influencing copper’s price. Through the first quarter, copper prices rose by nearly 11.60% but have dipped since the beginning of the second quarter by nearly 1.05% through April 2. The metal is still down by nearly 12.0% since early June 2018 when prices were at four-year highs.
A positive for copper has been efforts by the Chinese government to stimulate the economy, as well as the uptick in China’s manufacturing sector (discussed earlier), given that China accounts for about half of world copper demand. Hopes of the U.S. and China coming to an agreement on terms for a trade deal could also be a boost for prices.
A broader look at commodities’ performance comes from Saxo Bank, which notes that the Bloomberg Commodity Index traded 9.0% higher in the first quarter. Even with concerns over a slowdown for the global economy, the price rise was led by growth-dependent commodities, such as energy, up 17.0%, and industrial metals, up 12.5%.
For the oil market, sentiment has clearly shifted as prices have broken out from longer-term averages and have rebounded from the fourth quarter’s bear market. Supply constraints during the final weeks of the first quarter also pushed prices higher, even as inventories of U.S. crude jumped in late March – partly the result of scheduled and unscheduled refinery outages and temporary shipping channel constraints.
West Texas Intermediate crude closed out the first quarter with a 32.4% gain since the start of the year, trading at $60.14 a barrel. Brent crude also rose sharply, gaining 27.12% during the same period, to $68.39 a barrel.
Production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and countries aligned with the group known as OPEC+ are also contributing to price support at current levels. Added involuntary production cuts from Iran, which is under U.S. sanctions (though waivers were granted to buyers) and Venezuela (which has faced sanctions, political turmoil and mismanagement of its energy resources) have added an additional layer of support, Saxo Bank says.
The six-month waivers granted by the U.S. to buyers of Iranian oil are due to expire in May, raising questions as to the direction of oil prices. “But with Opec+ continuing to cut production and the US forcing down exports from Iran and Venezuela, only a major change in the outlook for demand will alter the current positive sentiment,” Ole Hansen, Saxo Bank’s head of commodity strategy, wrote in the bank’s second quarter outlook. 12
- Shane, D. (2019, April 1). China’s factories are now defying the economic slowdown. CNN Business. Retrieved from: https://www.cnn.com/2019/03/31/business/china-caixin-pmi/index.html
- IHS Markit. (2019, April 1). IHS Markit Eurozone Manufacturing PMI® ─ final data [Press Release]. Retrieved from: https://www.markiteconomics.com/Survey/PressRelease.mvc/feec34453d624bf6888a8841055e6954
- Bellucci, L. (2019, April 1). S&P 500® Has Best First Quarter in over 20 Years – But Upward Momentum Slows. S&P Dow Jones Indices. Retrieved from: http://www.indexologyblog.com/2019/04/01/sp-500-has-best-first-quarter-in-over-20-years-but-upward-momentum-slows/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+SPDJI-IndexologyBlog+%28S%26P+DJI+Indexology+Blog%29
- Bimson, B. (2019, April 2). Houston, We Have An Inverted Yield Curve. BCJ Insights. Retrieved from: http://bcjinsights.com/houston-we-have-an-inverted-yield-curve/
- Census Bureau. (2019, April 2). Monthly Advance Report On Manufacturers’ Shipments, Inventories And Orders February 2019 [Press Release]. Retrieved from: https://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf
- Institute for Supply Management. (2019, April 1). March 2019 Manufacturing ISM® Report On Business® [Press Release]. Retrieved from: https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?navItemNumber=31128
- ADP. (2019, April 3). The ADP National Employment Report [Press Release]. Retrieved from: https://www.adpemploymentreport.com/2019/March/NER/docs/ADP-NATIONAL-EMPLOYMENT-REPORT-March2019-Final-Press-Release.pdf
- Mortgage Bankers Association. (2019, April 3). Mortgage Applications Increase in Latest MBA Weekly Survey [Press Release]. Retrieved from: https://www.mba.org/2019-press-releases/april/mortgage-applications-increase-in-latest-mba-weekly-survey
- Freddie Mac. (2019, April 4). Mortgage Rates Remain Stable [Press Release]. Retrieved from: https://freddiemac.gcs-web.com/node/15321/pdf
- Boesel, M. (2019, April 2). February Sees Large Deceleration in Home Price Gains. CoreLogic, Inc. Retrieved from: https://www.corelogic.com/blog/2019/04/february-sees-large-deceleration-in-home-price-gains.aspx
- National Association of Realtors (2019, March 22). Existing-Home Sales Surge 11.8 Percent in February [Press Release]. Retrieved from: https://www.nar.realtor/newsroom/existing-home-sales-surge-11-8-percent-in-february
- Saxo Bank. (2019, April 1). Q2 2019 Quarterly Outlook. Saxo Bank. Retrieved from: https://www.home.saxo/-/media/content-hub/documents/2019/april/saxo-q2-quarterly-outlook-2019.pdf?la=en
Sources for Financial Data:
Dow Jones Industrial Average:
10-Year Treasury Note:
U.S. Dollar Index:
West Texas Intermediate Crude Oil:
Brent Crude Oil:
Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 19-55