Investors React Positively as Retail Sales Increase
As I was watching the market reactions yesterday, there seemed to be a lot of optimism floating around as equities rose to their highest levels since 2007, and the dollar, according to the dollar index, finished the day above 80. Yesterday started out with a bang on US trading as retail sales came in, as expected, with a 1.1% gain for February. This rise, which was the biggest in five months, coupled with a small upward revision to January’s number, had many jumping for joy. The higher retail numbers were being attributed to the better jobs report of late, which does provide support, but I would like to see a lot more before I join the masses by dancing in the streets.
While the mainstream media do not put much focus on this, I usually take a moment to glance at the “ex auto and gas” figure to get a deeper sense of where things stand. This report painted a different picture than the headline report. We did see it come in at a higher-than-expected 0.6%, but it was actually lower than the 1% revision to January. The initial figure from January was 0.6%, so even if we took that higher revision out of the equation, we didn’t see the same type of movement. While vehicle sales did have a good month, it looks to me that higher gas prices are starting to play a bigger role.
Consumers can deal with higher fuel prices in the short run, but if we continue to see oil prices rise, there will be a competition for that discretionary income. I think the priority for most people will be to keep the gas needle from hitting “E.” rather than buying a new summer wardrobe, so it’ll be interesting to see how things progress over the next few months. I don’t see too many scenarios on the horizon that would keep a lid on oil prices, except for another round of global growth worries. I went on a tangent there, so I’ll steer us back on track.
Moving on to the other data reports from yesterday, we saw confidence among small-business owners climb to a one-year high in February, as profits have been on the rise. At the same time, the report also revealed they weren’t as keen on the economy as a whole. Expectations for better business conditions over the next six months fell, as did intentions of making additional capital purchases, so it turned out to be a mixed bag. Once the data cupboards were drained, the markets remained in a holding pattern until early afternoon, when the results of the Fed meeting finally hit the airwaves.
Chuck sent me some thoughts on the Fed’s meeting and more before he heads down to south Florida for his annual spring training pilgrimage, so here you go:
“Well, the Fed’s FOMC meeting ended yesterday with the Fed leaving rates unchanged (there was one Fed Head that voted to raise rates!), and refused to offer any information on future programs that are being tossed around to bolster the economy. In their assessment of the economy, the Fed Heads acknowledged improvements in the labor market, but did put out the caution flag saying risks remain that inflation could rise temporarily because of recent increases in oil and gas prices.
“Hmmm… I go back to about a year ago. Didn’t Big Ben tell us that the rising inflation we saw then was ‘only transitory’? Well, the US consumer has to feel as though that inflation has transitioned into their pockets!
“Moving on — for these are not the droids we’re looking for. Look who’s touting currency diversification. You wouldn’t guess in a million years, we used to say as kids, but back in 1995, the US dollar was under pressure, and then US Treasury Secretary Robert Rubin made it a point to say that ‘a strong dollar is in the best interest of the US.’ In other words, he was telling anyone that was courageous enough to short the dollar, that the US would not stand idly by. This scared the bejeebers out of the markets, and soon we were experiencing a strong dollar trend.
“Well, just the other day, Robert Rubin — yes, that same Robert Rubin from 1995 — said he has too much of his personal investments in the currency.
“A ‘disproportionate amount’ of his assets is in cash, and he ‘should be more allocated away from the dollar,’ Rubin, 73, said the other day in a speech at the TradeTech conference in New York. He said he also was ‘greatly overweighed’ in private equity and had investments in hedge funds.
“And before I hand it back over to Mike… You all know that I’ve said quite a few times recently that I believe that the economy is presently in the ‘eye of the storm,’ and that the bad stuff on the other side would be worse than the original storm in 2008. Well, here’s a story that plays well with that thought.
“The global liquidity cycle has already rolled over. Assuming that no fresh action is taken, world economic growth will peak within a couple of months, and then fade in the second half of the year — with grim implications for Europe’s Latin bloc.
“Data collected by Simon Ward at Henderson Global Investors show that M-1 money supply growth in the big G-7 economies and leading E-7 emerging powers buckled over the winter.
“The gauge — known as six-month real narrow money — peaked at 5.1pc in November. It dropped to 3.6pc in January, and to 2.1pc in February.
“This is comparable with falls seen in mid-2008 in the months leading up to the Great Recession, and which caught central banks so badly off guard.
“‘The speed of the drop-off is worrying. This acts with a six-month lag time, so we can expect global growth to peak in May. There may be a sharp slowdown in the second half,’ said Mr. Ward.
“And with that, I wanted to wean you slowly away from my writing, so this will serve as the last official words you hear from me for the next two weeks! I’m not even taking my laptop with me! So back to Mike!”
Thanks for those departing words. As Chuck mentioned, the Fed still kept global concerns on the table, but investors seemed to parlay the better retail numbers with the acknowledgement of labor improvement by the Fed into an official improvement stance. It wasn’t too long ago that policymakers actually lowered their forecasts, but the April meeting will have more teeth, as they offer up an update to their official economic assessment followed by commentary from Bernanke.
Moving over to the currency market, I guess you could call it a choppy day, but the dollar index did remain positive throughout the session. Remember, the euro (EUR) comprises a majority of this measure, followed by the yen (JPY), so it doesn’t give a true sense of the overall market.
Focusing on the euro for a moment, we did see some positive news that helped to keep the currency in a 1.31 handle until the Fed meeting pushed it back into the 1.30 range. German investor confidence rose more than forecast in March and marked the fourth straight increase. As some of the doomsday scenarios surrounding the debt crisis have eased a bit, at least for the moment, investors felt a little more comfortable.
Speaking of the debt crisis, Fitch decided to raise the Greek credit rating four levels, to B-, from the previous rating of restricted default. The new government bonds were given this B- rating while outstanding debt not governed by Greek law has a C rating until settlement in April. Fitch said in a statement that completion of the exchange has cured the rating default event, and the distressed debt exchange along with the losses imposed on bondholders have significantly improved Greece’s debt service profile and reduced the risk for a recurrence of near-term repayment difficulties on the new Greek government securities.
Fitch also decided to give Greece a stable outlook, which seems a little overzealous to me. It almost reminds me of credit card companies sending invites to those who recently filed bankruptcy, which is a risky proposition. While it may be a while before things could get back to where they were, the propensity still remains. Hopefully, this was a final wake-up call and the train stays on track. Just to wrap this up, Fitch did acknowledge default risk is still elevated and challenges remain, so it looks like they’re trying to cover both sides of the plate.
The dollar strength was primarily confined to a handful of assets, which also included the Japanese yen. The yen fell to nearly a one-year low as it briefly traded into the 83 handle. We saw the currency begin to fall last month as policymakers unexpectedly boosted the bond buying program, but the trend has gained steam as the Bank of Japan continues to take steps in tackling deflation. Chuck has warned about the yen’s shaky foundation for a while, so this shouldn’t be a surprise, but its nearly 1% loss yesterday made it the worst-performing currency.
Gold was the other unfortunate asset that got smacked around a little bit. It ended the day around $1,675, losing about $25, but the majority of the loss came after the Fed meeting. In fact, gold was hovering around positive territory early on, but lost its luster when investors saw rays of light shining through the US economy. You would think acknowledgement of higher inflation would be enough to support its pricing, but the rose-colored glasses in the US and Europe kept gold in the red.
Speaking of the Mexican peso (MXN), it turned in the best performance of the day by rising just over 0.75%. The majority of its rise resulted from a free ride on the US data train, but they did see industrial production rise in January. Again, there is just too much risk associated with the underlying economy, but I thought I would at least give an update, as promised. The Canadian dollar also took a free ride as the pro-North American trade carried the currency to just under a 0.5% gain. While there weren’t any data out of Canada, they at least have supportive fundamentals.
The Australian (AUD) and New Zealand dollars (NZD) both posted gains as higher stock prices provided some wind for their sales. We did have some stronger housing and food price numbers out of New Zealand that gave the currency an extra push to finish the day in second place, but both currencies — more so the Aussie — are also proxies for global growth, so thoughts of sustained improvement in the US definitely helped. All in all, it turned out to be a good day for currencies tied to North America and higher global growth, but not so good a day for safe havens, such as gold.
As I came in this morning, the dollar held onto its relative strength from yesterday, as all of the major currencies, including China, are in the red. Gold has taken another hit so far this morning and is down $15. It looks like the euphoria in the markets spurred by the Fed has rolled over into early trading, and there isn’t much on the docket today that would appear to turn the tide. Barring any rogue headlines about the European debt crisis, it looks like the table is set for the US dollar.
Then there was this: The Federal Reserve announced that 15 of the 19 biggest financial institutions in the US have the capital to survive a deep recession. “When you put banks under the kind of dramatic scenarios that the Fed did — and they are still doing well — it tells you how well capitalized the majority of the banks are coming out of this downturn,” said Michael Scanlon, a senior equity analyst at Manulife Asset Management. However, signs remain that the financial industry hasn’t completely recovered from the global financial crisis.
To recap: Retail sales in the US kick-started the dollar, as overall sales rose to a five-month high of 1.1%, but continually high gas prices could steal from consumer discretionary spending. Small-business sentiment did rise, but owners are still hesitant to go all in with the economy as a whole. Chuck gives us some thoughts on the Fed meeting. the currency market was choppy at best, although the dollar did see strength. Euros, yen and gold took a hit as US economic optimism took hold and currencies associated with global growth saw a decent day.