Forward into Broad, Sunlit Uplands

  • MACRO VIEW

May 07 2014

It’s topsy turvy season as U.S. interest rates are falling when they should normally be rising and because 2014 might be the year to ignore the age-old advice to sell in May and go away.

 

Global CIO Commentary by Scott Minerd

Last week’s first-quarter U.S. GDP data reflected weakness associated with the winter soft patch, however, with the effects of terrible weather now firmly in the rearview mirror we should enjoy a rebound in economic activity in the second quarter. Unlike in recent years, I expect the U.S. economy will strengthen as we move toward summer.

The great conundrum of course is U.S. interest rates. With the American economy adding jobs, consumer spending accelerating, and economic data generally looking strong, interest rates should be rising rather than falling. Nevertheless, capital flows from overseas are playing a crucial role in keeping interest rates low. Firstly, we have the “Putin Put” -- as tensions escalate in Ukraine there is a flight to safety putting downward pressure on U.S. Treasury yields. Secondly, Japan’s first sales tax increase since 1997 will likely cause a slowdown in consumer spending, which could very well lead to an acceleration of monetary stimulus there. Such a move would likely prompt China to further devalue its renminbi currency, which would likely drive increased Chinese demand for U.S. Treasuries.

So in the face of strong U.S. economic fundamentals, which should be pushing interest rates higher, technical factors at home and abroad have driven interest rates in the opposite direction. This only adds to already improving U.S. economic prospects. Low interest rates and increasing employment will have a positive impact on housing and on consumer confidence and spending. We will also likely see a pick-up in mergers and acquisitions activity, and U.S. first-quarter corporate earnings have beaten estimates -- factors which should help push equity prices even higher. In fact, 2014 may be a year where it is wise to ignore the old adage to sell in May and go away.

Chart of the Week

Increasing U.S. Capex Should Boost Growth

Despite weak first-quarter U.S. GDP, which will likely be revised lower after Tuesday’s trade figures, the American economy is on sound footing and looks set to accelerate over the rest of the year. Consumer demand was strong in the first quarter, and the economy is due for a surge in business investment. Rising business confidence, increased capacity utilization, and business surveys all point to increasing capex in the coming quarters. The most recent Senior Loan Officer Survey showed that bank lending standards continue to loosen, which should lead to a near-term jump in capex.

U.S. COMMERCIAL AND INDUSTRIAL LOAN LENDING STANDARDS AND CAPITAL EXPENDITURES

U.S. COMMERCIAL AND INDUSTRIAL LOAN LENDING STANDARDS AND CAPITAL EXPENDITURES

Economic Data Releases

U.S. Unemployment Drops as Consumer Spending Accelerates
  • Non-farm payrolls added 288,000 jobs in April, much better than the expected 218,000. The prior two months were revised up by 18,000, and the added jobs were spread across industries.
  • The unemployment rate dropped to 6.3 percent from 6.7 percent. However, the change was entirely due to falling labor force participation, which dropped 0.4 percentage points.
  • Both average hourly earnings and average weekly hours were flat in April, indicating little wage pressure.
  • The ISM manufacturing index rose for a third consecutive month, reaching 54.9 in April -- the best reading this year. The employment subindex showed a large increase.
  • The April ISM non-manufacturing index increased to 55.2, the highest level since August. The new orders index surged by the most in four years.
  • Initial jobless claims jumped to 344,000 for the week ended April 25, a three-month high. The increase was likely a result of seasonal adjustments related to the timing of Easter.
  • Consumer spending surged by 0.9 percent in March, nearly a five-year high. Spending on durable goods led gains.
  • The core PCE deflator increased to 1.2 percent year-over-year in March, up from 1.1 percent in February.
  • The trade deficit narrowed in March to $40.4 billion from $41.8 billion. Though the gap decreased, the deficit was still greater than the BEA had assumed in their first-quarter GDP estimate, meaning GDP will likely be revised to a negative figure.
Euro Zone Retail Sales Strong, China PMI Data Mixed
  • Euro zone retail sales beat expectations in March, rising for a third consecutive month by 0.3 percent.
  • The unemployment rate in the euro zone remained at 11.8 percent for the fourth month in a row in March.
  • The U.K. manufacturing PMI bounced up to a five-month high in April of 57.3.
  • China’s official manufacturing PMI inched up for a second consecutive month in April, increasing to 50.4 from 50.3 on the back of a rebound in new orders.
  • China’s HSBC manufacturing PMI was revised down to 48.1 for April, adding to evidence of slowing economic growth.
  • The HSBC China services PMI ticked up but remained in contractionary territory in April at 49.5.


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