Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.
German 10-year bond yields dived below zero while European shares and the euro fell after grim data from the continent fueled fears of a global economic slowdown following this week’s dovish turn by the U.S. Federal Reserve. The eurozone’s manufacturing PMI fell further to 47.6 in March from 49.3 in February. MSCI’s gauge of stocks across the globe slipped 0.2%, pulling away from the five-and-a-half month high earlier in the week. The Stoxx Europe 600 fell 0.6% as of 10:10 London time. The German 10-year yield tumbled four basis points to 0.01%, the lowest in more than two years. New Zealand’s 10-year bond dropped below 2% for the first time and Australia’s bond was approaching an all-time low, as the world’s central banks wound up another week showing they can’t yet tighten monetary policy.
Manufacturers in Europe, Japan and the United States suffered in March as surveys slowed by trade tensions left a mark on factory output, a setback for hopes the global economy might be turning the corner. In New York, the U.S. 10-yeaar Treasury note yield plunged to a 14-month low as growth worries further weighted on inflation expectations. The benchmark yield dropped below the yields on all maturities for the T-bills for the first time in 12 years, a so-called yield inversion that often is a harbinger of economic recession. U.S. stocks, European stocks and the euro fell on Friday. The benchmark S&P 500 was off 1.6% for the day and on pace for the biggest drop on nearly three months. Global trade tensions continue to be among the main drivers of the gloom. The U.S. and China resume trade talks in the next working week, but it is unclear whether the two sides can narrow their differences and end the trade war between the two countries. European officials are also worried about the risk of U.S. tariffs on car imports from Europe.
The Fed strengthened its commitment to being patient by showing no rate hikes anticipated this year. It is consistent with recent rhetoric that has the Fed sitting on the sidelines until some of the cross currents that have slowed the economy begin to subside. No longer will sold GDP growth and low unemployment rates provide enough reason to raise rates. Inflation would have to accelerate enough to move the Fed back towards a tightening bias. The global economy is slowing and domestic risks from trade, tariffs and greater uncertainty has made the Fed uneasy about the economy’s course. The economy slowed its growth rate significantly in the first quarter, with real growth expected to have come in between 0.5% to 1.0%. A bounce back for the economy is projected in following quarters, but the bar has been lowered as the fiscal stimulus and tax reduction stimulus of last year is fading. A successful completion of a trade deal with China and the U.S and a more orderly Brexit. may help renew confidence and investment on a global scale. However, until that happens, there is still great uncertainty that the economy could weaken again if political efforts fall short. Given the present circumstances, the Fed is wise to wait but the economy may see a bumpier 2019 than anticipated.
Besides the FMOC meeting, the leading economic indicators advanced 0.2% in February. While the index signals growth, the positive contributors to the index have been getting smaller. Fears the yield curve have returned with a vengeance Friday. Because of its track record, an inverted yield curve has raised the odds of recession. Some additional light needs to be thrown on this subject. First, the yield curve must be inverted for at least a month to send a clear message. Day-to-day inversions and even week-to-week inversions may be more noise than message. In this case, the curve was only inverted for part of a day and closed at zero. It had compressed by 14 basis points over a week. Second, the 10-year Treasury is no longer risk free and may represent more fears of a global slowdown than a U.S. one. Another factor is monetary policy. Past inversions in the curve that resulted in a recession coincided with actual fed funds rates noticeably above the long-term equilibrium fed funds rate. Current fed policy is not restrictive. There is both upside and downside risks to the economy. A big weight on both the global and domestic economy could be lifted if a trade deal with the U.S. and China could be completed. That would lift equity markets, restore confidence and lift investment. On the negative side, the U.S. economy is slowing, and the global economy is sputtering. Renewed trade tensions between the U.S. and China and tariffs on European autos could sink Europe and slow China to a crawl. The U.S. would not escape a global recession.
Next week, we will get some insight on housing starts ,international trade, pending and new home sales and personal income and outlays.
The U.S. Economy:
The NAHB sentiment index was unchanged in March at 62. Two of the three subcomponents increased during the month. Current sales edged up 2 points to 68., while expected sales rose 3 points to 71. Buyer traffic declined 2 points to 69. Housing fundamentals are solid in terms of job and rising incomes. Even though, single-family starts have been very subdued. Affordability is an issue. Housing activity will likely remain slow over the next few quarters.
Factory orders increased 0.1% in January for a second consecutive month. Orders in the important core capital goods sector, rose 0.8%. Shipments also rose 0.8%. Transportation orders increased 1.2% and are up a robust 16.3% from a year earlier. Core capital goods orders are up 4.2% from a year earlier but have been weak since late-2017. Manufacturing is holding up at a subdued level but bears watching. The ISM manufacturing index retreated in February and the manufacturing component of the industrial production report has been negative for two months. Trade and the slowdown in the global economy are headwinds to manufacturing activity. Still, we do expect manufacturing to remain positive, but the growth rates will be subdued comparted to 2018.
The Conference Board’s index of leading economic indicators rose 0.2% in February, following no change in January and a 0.1% retreat in December. Stock prices and the leading credit index made the largest contributions to the February increase. The labor market’s contribution was negative in February, with jobless claims and average workweek for manufacturing workers decreasing. On net, financial markets were positive for the moth and the interest rate spread for the 10-year Treasury and the fed funds rate increased 0.03%. The ISM manufacturing new orders index held steady last month and industrial production increased 0.1% in February. Manufacturing again was a weak spot.
Existing home sales bounced back in February, increasing 11.8% to an annual pace of 5.51 million units. Sales remained down 1.8% from a year earlier. The increase was noted in three out of four Census regions, with only the Northeast being flat. Sales of existing single-family homes totaled 4.94 million in February, up 1.3% from January but still down 1.4% from February 2018. Sales of condo/co-op homes totaled 570,000 in February, flat from January but down 5% y/y. The market for single-family homes tightened considerably in February despite an increase in inventory. Homes listed for sale at the end of February totaled 1.44 million, up 2.1% from January and up2.9% from February 2018. The inventory-to-sales ratio equaled3.5 months in February, down from 3.9 months in January, but up slightly from 3.4 months in February 2018. Even so the supply of homes for sales remains low and the I/s ratio is still close to a cyclical low. Mortgage rates have fallen through February, but further declines are unlikely. Price growth is slowing so new homes are becoming more competitive.
Wholesale inventories expanded by 1.2% in January, well above expectations of growth of just 0.2%. Both categories added to the January increase. Durable goods inventories increased by 0.9% and nondurable goods rose by 1.6% for the month. Wholesale sales increased 0.5%, a reversal from the 0.9% decline in December. The inventory-to-sales ratio edged up to 1.34 from 1.33 in December. Within durable goods, the biggest increase was in electrical inventories, which rose 3%. Lumber stocks fell by 2.1%. Wholesale durable goods inventories stood 11.7% above their year ago level. Within nondurable goods, petroleum inventories surged 10.7%, but farm goods fell by 1.8%. Over the past year, nondurable inventories are up 1.8%. The January increase in sales was good news because it was the first rise in three months. However, most of the sales increase was in nondurable goods, which indicate future gains are not guaranteed.
German manufacturing contracted further in March, compounding fears that unresolved trade disputes are adding to a slowdown in Europe’s biggest economy. The German manufacturing PMI fell to 44.7, below the 50 mark that separates growth from contraction for a third month. Growth in services slowed to 54.9 from 55.3. The slowdown in manufacturing is not confined to Germany. The euro-zone’s manufacturing PMI fell to a 71-month low of 47.7 in March from 49.4 in February. Growth in the euro-zone slowed to 0.2% in the final quarter of 2018, the slowest in four years and estimates the first quarter will come in at the same pace. Analysts are concerned the weakness in manufacturing is a lingering concern and that weakness may spread if the industrial weakness intensifies.
Important Data Releases This Week
February Chicago Fed National Activity Index will be released on Monday, March 25 at 8:30 AM EDT. The index is projected to swing back to a plus 0.10 in February after falling unexpectedly in January to a minus 0.43 on a downswing in auto production. The 3-month index has been steady, at a moderate and positive 0.16 in both January and December.
February housing starts will be released on Tuesday, March 26 at 8:30 AM EDT. The housing market is projected to remain flat for February, coming in at 1.201 million, following a decent January surge to 1.230 million. Permits are projected to fall to 1.300 million, from January’s 1.345 million.
January international trade will be released on Wednesday, March 27 at 8:30 AM EDT. We see the deficit falling slightly to $57.4 billion in January, down from December’s $59.8 billion.
February pending home sales will be released on Thursday, March 28 at 10:00 AM EDT. We see sales turning lower by 1.0% in February after the big 4.6% surge in January.
February personal income and outlays will be released on Friday, March 29 at 8:30 AM EDT. Personal income is projected to rise 0.3% in February after falling 0.1% in January. Personal spending will also rise 0.3%. The PCE deflator is projected to remain unchanged, up 1.4% from a year earlier. The core PCE deflator is projected to increase 0.2% in February, up 1.9% from a year earlier.
February pending home sales will be released on Friday, March 29 at 10:00 AM EDT. We see sales turning higher to 616,000 units up from 607,000 in January.