This week, we’ll get some February economic reports that should give us a sense of how we’ve done in the wake of the unusually harsh winter. We’ll also get an early read on consumer and business sentiment in March as tensions in Eastern Europe waned.
Still, we continue to experience sluggish growth in what Mohamed El-Erian has dubbed “the New Normal.”
However, El-Erian thinks the likelihood of things getting better (or worse) has increased.
“Over the short-term, the economic baseline calls essentially for more of the same, along with fatter two-sided tails for the distribution as a whole,” he wrote in a new post for Business Insider. “Specifically, absent major policy mistakes or geo-political/market accidents, western growth will gradually improve in 2014, but unfortunately still fall short of escape velocity. Over the medium-term, however, the probability of tipping into one of the two tails is likely to increase: so either the west reaches a critical point of internal healing that enables growth at or above potential for a while; or now-deeply embedded structural problems contribute to more prolonged low growth with significantly higher probability of financial volatility.”
Here’s your Monday Scouting Report:
Russia Is Dangerously Close To Recession: Everyone seems to agree that Russia is doing itself more harm than good with its aggression on the Ukraine border.
Wall Street’s economists have been slashing their forecasts for the massive economy. In a note titled “Security Shock Pushes Economy Close to Recession,” Morgan Stanley’s Jacob Nell and Alina Slyusarchuk axe their 2014 GDP growth forecast big time. From their note: “We have revised down Russian growth from 2.5%Y to 0.8%Y in 2014 and from 2.6%Y to 2.1%Y in 2015. This is partly due to weaker-than-expected 2013 growth at 1.3%Y (Morgan Stanley: 1.5%Y) and a sharper-than-expected fall in RUB, but in particular the result of a ‘security shock’ that will hit growth. We see consumption falling from 4.7%Y to 1.0%Y in 2014, as a result of increased household savings, particularly in FX, and investment falling from our previous forecast of 4.5%Y to -5.1%Y, as a result of uncertainty. We see two main channels for this security shock: i) A change in risk perception, following recent events in Crimea and consequent enhanced security concerns; and ii) The impact from higher rates. As a result, we see growth at -0.8%Q in 1Q14 and 0%Q in 2Q14, dangerously close to recession.”
- Markit Flash US Manufacturing PMI (Mon): Economists estimate the preliminary reading on March PMI slipped to 56.5 from 57.1 in February.
- S&P/Case-Shiller Index (Tues): Economists estimate the Case-Shiller home price index climbed 0.6% month-over-month or 13.30% year-over-year in January. “The CoreLogic home price index surged 1.9% mum in January, the largest gain in the index since March 2005,” said Bank of America Merrill Lynch economists who expect 0.8% growth. “This suggests upside risk to the Case Shiller report. However, we think that there are likely distortions to the CoreLogic print related to the share of distressed sales and difficulty seasonally adjusting the data.”
- Conference Board’s Consumer Confidence Index (Tues): Economists estimate the Conference Board’s sentiment index climbed to 78.5 in March from from 78.1 in February. “Gasoline prices are edging higher, and the news out of Eastern Europe is disquieting at best, but we suspect the resilience of the equity markets and continued improvements in labour markets will win the struggle for consumers’ confidence,” said Credit Suisse economists. “And the end to a tough winter in the East can’t hurt.”
- Richmond Fed Manufacturing Index (Tues): Economists estimate this regional manufacturing activity index climbed to 3 in March from -6 in February.
- New Home Sales (Tues): Economists estimate sales fell 4.9% month-over-month to an annualized pace of 445,000 units. “Mortgage purchase applications tumbled in the month while the NAHB housing index pointed weakening activity,” said Bank of America Merrill Lynch economists. “The risk is that we see a bigger decline in February with downward revisions to prior months.”
- Durable Goods Orders (Wed): Economists estimate orders climbed 0.8% in February. Nondefense capital goods orders excluding aircraft is estimated to have climbed by 0.5%. “Industry data point to a further pullback in aircraft orders, which have been correcting in recent months after surging to record highs last year, which will likely weigh on headline orders,” said Morgan Stanley’s Ted Wieseman. “Nondefense capital goods ex aircraft orders rebounded 1.5% in January and surged 3.0% excluding a correction in farm machinery from unusually elevated late 2013 levels (-32% in January after a 70% spike in November and December combined). We look for a further advance in core capital goods orders in February but at a more moderate pace, consistent with mixed results from business surveys.”
- GDP (Thurs): Economists estimate GDP grew at a 2.7% annualized pace in Q4, with personal consumption climbing 2.6%. “The Census Bureau’s quarterly services report showed good revenue growth in a number of service sectors in Q4,” noted Morgan Stanley’s Wieseman. “Hospital revenues were especially strong, surging at a 15% annual rate from Q3. That was much higher than BEA assumed in the GDP report, and when they build in the Census data there is likely to be a big upward revision to consumption of healthcare services.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims climbed to 325,000 from 320,000 the week prior. “Initial jobless claims probably were unchanged, but the four- week moving average declined to a seven-year low, excluding the 2013 California computer backlog period,” predicted Citi’s Peter D’Antonio. “The number of beneficiaries probably fell and the insured rate held at 2.2% for a fourth consecutive week. On balance, claims continue to point to better labour market activity after severe weather weighed on the economy for several months. We would not be surprised by strong payroll prints in March and April.”
- Pending Home Sales (Thurs): Economists estimate sale climbed 0.1% month-over-month in February, but fell 8.5% year-over-year. “Following six straight months of notable declines, pending home sales finally turned in January, inching up 0.1%,” noted Bank of America Merrill Lynch economists. “We expect this rebound to continue in February, with sales growing a stronger 1.0% mum. Mortgage purchase applications have generally trended lower over the last few months, while new home sales have headed higher.”
- Kansas City Fed Manufacturing (Thurs): Economists estimate this regional manufacturing index climbed to 5 in March from 4 in February.
- Personal Income And Spending (Fri): Economists estimate income and spending both climbed by 0.3%. “The key driver of growth in January was a 0.8 per cent pop in spending on services, which was the result of a boost in spending on healthcare services due to effects from the Affordable Care Act (ACA),” noted Wells Fargo’s John Silvia. “On the other hand, spending on durables and non-durables fell 0.2 per cent and 0.7 per cent, respectively. Despite growth in January being largely driven by an outlier effect from the ACA, our outlook is still generally positive for personal consumption, as all components are experiencing firm growth on a year-over-year basis. While effects from the ACA may fade, service spending should receive further support from utilities, as February was still a rather cold and snowy month.”
- Univ. Of Michigan’s Consumer Confidence (Fri): Economist estimate this measure of sentiment climbed to 80.5 in March from 79.9 February. “This would reflect equity markets, which have moved higher from their February levels, as well as the fading of the effects of unusually severe weather conditions across many parts of the country,” said Barclays’ economists.
Last week, S&P Dow Jones Indices published their latest scorecard of S&P indices versus active funds. It confirmed that over the long-run, most active investment managers across all categories fail to deliver returns that beat the market.
Fund manager Clifford Asness recently made an interesting observation about the fund management industry.
… In fact, in our years of managing money, it seems like whenever we have found instances of individuals or firms that seem to have something so special (you never really know for sure, of course), the more certain we are that they are on to something, the more likely it is that either they are not taking money or they take out so much in either compensation or fees that investors are left with what seems like a pretty normal expected rate of return…
Simply put, fund managers who are truly convinced they can beat the market aren’t that interested in sharing those returns with you. It’s something to think about, especially in this era of exorbitant fund management fees.
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