Europe, Data Weigh on Stocks
Equity markets retreated to start the second quarter, as a combination of poor economic data and concerns in Europe led to the steepest one-week drop of 2013. The S&P 500 declined 1.0% while the Dow Jones Industrial Average fell 0.1%.
Several central banks met last week, including the ECB, Bank of England, and Bank of Japan. While the ECB and BoE stood firm, Japan captured headlines by announcing a raft of new measures. Japan’s central bank meeting was the first under new Bank Governor Haruhiko Kuroda, recently appointed by Shinzo Abe, who is seen as an advocate of more aggressive accommodative policy.
The bank announced plans on Wednesday to institute a $1.4 trillion quantitative easing program, which will double the country’s money supply. The purchases focus on longer dated securities, in contrast to previous programs that emphasized only short-term bonds. The bank will also buy risk assets such as equities in its attempts to end a long period of deflation and boost prices toward a 2% target. The magnitude of the new measures stunned market participants, leading to a sharp decline in the yen and a boost in the local Nikkei exchange.
A Portuguese court rejected a number of austerity measures last week, agitating investors already unsettled by the recent Cyprus debacle. According to Reuters, economists estimate the elimination of those measures will cost the country $1.17 billion. Among the cuts overturned were reductions in sick leave and unemployment benefits, as well as decreases in certain public employee bonuses. Despite the rejection, analysts believe the country should be able to meet its spending reduction targets through additional measures. The overturning of the cuts underscore a deeper theme of anti-austerity sentiment in Europe, however, which is threatening incremental fiscal progress made in the region.
Europe remains under severe economic pressure, creating further challenges to implementing such fiscal tightening. The final estimate of Eurozeon GDP in the fourth quarter confirmed a contraction of 0.6%. Unemployment also rose to its highest levels since the union was formed, hitting 12.0%. While Germany’s jobless rate held steady at 5.4%, France and Spain increased to 10.8% and 26.3%, respectively. Italy and Portugal remain elevated at 11.6% and 17.5%, respectively.
Economic data in the US was mostly disappointing last week, as several important readings revealed a soft patch in March.
On Monday, the Institute for Supply Management (ISM) announced that its acclaimed manufacturing index stumbled nearly three points to 51.3 in March. Although still in expansionary territory, this was the biggest one-month drop since January 2012. New orders experienced an even deeper plunge, falling more than six points to 51.4. Given orders’ tendency to project the future health of the manufacturing sector, the decline is not an encouraging development.
The ISM sister survey, known as the Non-Manufacturing Index, also showed weakness in March. The series declined from 56.0 to 54.4, which is the lowest reading in nine months. The report slipped on weaker employment and new orders data, but other components such as business activity remained robust.
One of the few indicators to exceed expectations last week was consumer credit, which expanded by $18.1 billion. Unfortunately, the lion’s share of the increase was attributable to student loans. Revolving credit, representing credit cards, expanded just $500 million in the period. The numbers indicate consumers remain wary of increasing their debt levels, outside of education loans.
Labor Markets Stumble in March
In an unexpected development, labor markets fell flat during March. Following several months of healthy job growth, the economy was only able to muster 88,000 new jobs in March, well below economists’ expectations for nearly 200,000 jobs.
The good news is that the number of jobs added in January and February was revised up moderately, but March was a clear disappointment. Extrapolating recent trends, there is a potential for March to be revised slightly higher, although the revisions are unlikely to reach the initial level of expectations.
Source: U.S. Economic Snapshot
By industry, the news was mixed, as one might anticipate. The highest level of job growth was seen in Professional & Business services, followed by Education & Healthcare and Construction. On the opposite side, the only area to suffer was Retail Trade, which shed 24,000 jobs. Other industries were mostly flat, a contrast to recent strength. This was particularly true in manufacturing, where 3,000 were lost after gains of 14,000 and 19,000 in January and February, respectively.
Source: Global Macro Monitor
The household survey, used to calculate the unemployment rate, showed equally high levels of weakness. The overall unemployment rate declined 0.1% to 7.6%, but that was primarily a result of a smaller labor force, and not new job growth. For instance, the labor force participation rate fell 0.2% to 63.3% and the employment-population ratio moved down slightly to 58.5%.
Source: U.S. Economic Snapshot
For individuals with a job, the news was ok, as average weekly hours on private payrolls rose to 34.6 and average hourly earnings for private payrolls was marginally higher. In the past year, hourly earnings are up 1.8%.
The March labor report was disappointing all around, especially given the recent improvement seen in job growth. There is some hope that the initial figure will be revised slightly higher, but regardless, this blip will likely keep the Federal Reserve thinking about ways to remain accommodative in order to support the economy.
The Week Ahead
Most eyes will be on the Federal Reserve this week, as minutes from the March 20 meeting of the Federal Open Market Committee are due for release. Minutes released in January surprised many market participants as committee members engaged in a more serious debate about the future of its quantitative easing program.
Economic data this week is highlighted by retail sales on Friday. The NFIB Small Business Optimism Survey is released on Wednesday and producer inflation data come out on Friday.
Several emerging markets central banks meet this week, including Poland, Serbia, Indonesia, South Korea, Chile, and Peru. Consensus expects each bank to leave its benchmark rate unchanged.
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