Month End Review
Financial Review by Sinclair Noe
DOW – 195 = 17,840
SPX – 21 = 2085
NAS – 82 = 4941
10 YR YLD + .01 = 2.05%
OIL + 1.19 = 59.77
GOLD – 20.60 = 1185.00
SILV – .44 = 16.20
For the month, the Dow was up 0.4 percent, the S&P 500 gained 0.9 percent and the Nasdaq rose 0.8 percent. For the month of April, the dollar index fell about 3.7 percent. Some month end portfolio buying pushed yields on ten year notes to 2.05% after hitting a 7 week high of 2.11% earlier in the session. The big mover in April was in the energy market, where crude oil jumped more than 21%. S&P 500 earnings for the first quarter now are forecast to have increased 1.1 percent from a year ago, Thomson Reuters data showed, while revenue is forecast to be down 3.2 percent.
The Commerce Department reports consumer spending rose 0.4% in March as households stepped up purchases of big-ticket items like automobiles; that follows a 0.2% gain in February. The savings rate fell for the first time in four months to 5.3% from 5.7%. A year earlier, Americans were saving at a 4.8% rate. Consumer spending rose 1.9% in the first quarter, down from 4.4% and 3.2% in the prior two quarters. That might indicate there is pent-up demand, but a rebound in economic activity could be crimped by an inventory overhang.
The Employment Cost Index, which measures the cost of employing the average US worker climbed 0.7% in the first quarter, compared to a 0.5% increase in the fourth quarter. And while there has been a lot of attention to low paying jobs in retail and restaurants, and talk about raising the minimum wage, the job gains last month came in higher paying professions. Professional, scientific and technical services workers saw a 2.1% gain, and the real estate, rental and leasing business saw a 1.5% advance. While retail employee pay rose 0.5% in the first quarter. In the 12 months through March, labor costs jumped 2.6 percent, the largest rise since the fourth quarter of 2008. They are approaching the 3 percent threshold that economists say is needed to bring inflation closer to the Fed’s 2 percent target.
Meanwhile, inflation as gauged by the PCE price index rose 0.2% in March. The core rate that excludes food and energy edged up a smaller 0.1%. The PCE inflation index has climbed just 0.3% over the past 12 months, though the core rate is up 1.3% in the same span.
The number of Americans filing first-time claims for unemployment benefits fell 34,000 to a seasonally adjusted 262,000 from a revised 296,000 in the prior week; that’s a 15 year low. This report from the Labor Department covered the period from April 19 to April 25, which included the Easter holiday, so the numbers should be taken with a grain of salt.
Another report showed that factory activity in the Midwest accelerated in April, after hitting a 5-1/2-year low hit in February. The Institute for Supply Management-Chicago’s business barometer rose to 52.3 from a March reading of 46.3. A reading above 50 indicates an expansion in the region’s factory sector.
The Dollar Index was lower, for its eighth consecutive day of declines, the longest losing streak since April 2011. The losses cap the dollar’s first monthly decline since June. When you get to where sentiment is all one way in one trade, the trade gets very crowded. According to Commodity Futures Trading Commission speculative traders cut net bullish bets on the greenback to a six-month low of 324,940 contracts last week. While the FOMC called anemic first-quarter growth, in part, “transitory” in its statement, the absence of a stronger signal for higher rates prompted dollar bulls to begin to doubt their conviction.
Yesterday, the FOMC brushed off a first quarter slowdown as weather-related and transitory; more consumer spending and fewer claims for unemployment would support the Fed’s outlook, and of course, the financial markets have been hooked on cheap money and accommodative policy from the Fed. Just a reminder that the first quarter of 2014 showed negative GDP, and then the economy came roaring back in the second and third quarters. The Fed seems to think we might see a repeat this year. Yesterday, the Commerce Department reported first quarter GDP growth of 0.2%, and if the economy comes roaring back, it’s a good bet the Fed will hike rates later this year. But there are no guarantees the economy will bounce back this year.
The Atlanta Federal Reserve Bank’s “GDP Now” forecast predicted first quarter GDP growth of 0.1% – pretty close to the reported number – and they predict second quarter GDP growth of 0.9%. And while that represents economic growth, consider that the strong dollar cut one percentage point from first quarter GDP; now the strength of the dollar is moderating, which should help exports and boost second quarter GDP. Also, bad winter weather lopped off one percentage point from the first quarter GDP number; nobody is predicting crippling snow storms hurting second quarter growth.
So, the big question is whether the Fed will raise interest rates, and the answer seems to be that they will be data dependent, as they continually repeat in their FOMC statements. Weighing in on the matter today is former Fed Chairman Ben Bernanke, who has become much more provocative since he left the Fed. Bernanke now writes a blog for the Brookings Institute. In his first blog he took on Larry Summers’ ideas about secular stagnation. In today’s blog he takes on the Wall Street Journal editors, specifically an editorial entitled “The Slow Growth Fed”, which argued that the Fed’s economic growth projections have been too high since the financial crisis (which Bernanke concedes is true). The WSJ then argues that monetary policy is not working and should be discontinued.
Bernanke responds: “It’s generous of the WSJ writers to note, as they do, that “economic forecasting isn’t easy.” They should know, since the Journal has been forecasting a breakout in inflation and a collapse in the dollar at least since 2006, when the FOMC decided not to raise the federal funds rate above 5-1/4 percent.”
Bernanke has a very good point. Plenty of people have been forecasting hyper-inflation and a dollar collapse. It hasn’t happened. They were wrong. Economic forecasting isn’t easy. But instead of looking at the data, some people, including the WSJ editors, insist that their version of reality must be correct and the data must be wrong.
Indeed, there is good reason to credit monetary policy with providing a boost to the labor market. Just look at the unemployment rate of 5.5% in the US compared to 11.3% unemployment in the Eurozone, where the ECB was slow to implement accommodative policy. Bernanke admits that monetary policy is not a panacea, and he said that several times when he was Fed chairman. Bernanke then writes: “I am waiting for the WSJ to argue for a well-structured program of public infrastructure development, which would support growth in the near term by creating jobs and in the longer term by making our economy more productive. We shouldn’t be giving up on monetary policy, which for the past few years has been pretty much the only game in town as far as economic policy goes. Instead, we should be looking for a better balance between monetary and other growth-promoting policies, including fiscal policy.”
Again, Bernanke has a great point; fiscal policy has been missing in action in the recovery. It is estimated that rebuilding the crumbling US infrastructure would create 13 million jobs. That is something that the Federal Reserve doesn’t control. The American Society of Engineers gives the US a “D+” for the state of its infrastructure, and estimated in 2013 that it will cost $3.6 trillion to bring America’s public infrastructure to an acceptable level by 2020. Chronic underinvestment in the nation’s essential infrastructure will ultimately require a national investment plan unseen since Europe’s post-war reconstruction.
According to the World Economic Forum’s Global Competitiveness Report for 2013, the US ranks 25th in the world in terms of overall infrastructure, behind such nations as Barbados and Oman, and only one spot ahead of Qatar. The quality of America’s air transport infrastructure is ranked 30th in the world, while quality of the electricity supply ranks 33rd. So, the business case for investment in infrastructure is strong, and even though the Federal Reserve is far from perfect, Dr. Bernanke is correct.
Later this evening, Elon Musk, the CEO of Tesla Motors will make a big announcement. He is expected to introduce a home battery product, which people can use to store energy from their solar panels or to backstop their homes against blackouts, and also a “very large utility-scale” battery product, which may do the same for large companies or even parts of the grid. Tesla’s $5 billion Nevada “Gigafactory” will likely provide most of the muscle behind this bid for a non-automotive product line. The factory will be the largest producer of lithium-ion cells in the world, and Tesla hopes economy of scale will drive prices down.
Tesla is already supplying batteries to homes and businesses like Wal-Mart through a pilot program and a supply agreement with another Elon Musk property, SolarCity. The storage batteries can absorb energy during peak production times, and discharge it later. This eliminates concerns about lack of wind or sun, and ensures that these resources don’t go to waste when they’re available.
Tesla isn’t the only company in the battery game, and whatever happens with Tesla, this market is expected to grow. A study by GTM Research and the Energy Storage Association earlier this year found that while storage remains relatively niche, the market was sized at just $128 million in 2014, it also grew 40 percent last year, and three times as many installations are expected this year.
There are still plenty of questions, including how much it will cost to drop off the grid. Stay tuned for the answers tomorrow.