Monthly Archives: March 2015

Market Insights 3/31/2015 – Q1 Ends

Stocks Close Sharply Lower on Last Trading Day of 1Q

The U.S. equity markets closed the final trading day of 1Q with steep losses, giving back most of yesterday’s large gains. Stocks declined as some divergent domestic economic data showed an advance in Consumer Confidence and a rise in U.S. home prices, while some regional manufacturing activity improved but remained in contraction territory.

Treasuries were mostly higher along with the U.S. dollar, while gold and crude oil prices were lower.

The Markets….

The Dow Jones Industrial Average declined 200 points (1.11%) to 17,776

The S&P 500 Index was 18 points (0.88%) lower at 2,068

Small and MIdcaps faired better than largecaps as the MidCap 400 lost .87% and the SmallCap 600 gave back .41% as the S&P 500 retreated by .88%.

The tech heavy Nasdaq Composite lost 47 points (0.94%) to 4,901

In moderately heavy volume, 938 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil slid $1.08 to $47.60 per barrel, wholesale gasoline declined $0.03 to $1.77 per gallon

The Bloomberg gold spot price decreased $2.07 to $1,184.01 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.4% to 98.34

Consumer Confidence and home prices rise, while regional manufacturing output misses

The Consumer Confidence Index rose to 101.3 in March—the second highest reading since August 2007—from an upwardly revised 98.8 in February and compared to the Bloomberg estimate of 96.4. The upbeat confidence figure came as a solid month-over-month gain for the component pertaining to expectations of business conditions more than offset a decline in the present situation. Also, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—held steady at -4.8 last month.

The Chicago Purchasing Managers Index showed growth in Midwest activity improved but remained in contraction territory for the second-straight month, rising to 46.3 in March from 45.8—which was the first contraction reading (below 50) since April 2013—in February, and versus expectations of an improvement to 51.7.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 4.6% year-over-year in January, inline with estimates. M/M, home prices were up by 0.9% on a seasonally adjusted basis for January, above forecasts calling for a 0.7% gain.

Treasuries were mostly higher, with the yields on the 2-year and 10-year notes declining 2 basis points to 0.55%, and 1.93%, respectively, while the 30-year bond rate was nearly unchanged at 2.54%.

Tomorrow, the domestic economic calendar will heat up, with a couple reads on manufacturing activity, headlined by the ISM Manufacturing Index, projected to dip to 52.5 for this month, from 52.9 in February. Also, Markit will release its final Manufacturing PMI Index for March, expected to be unrevised at the preliminary report’s 55.3 level, but up slightly from 55.1 in February. Readings above 50 for both indexes denote expansion.

In the past 45 days vast swings have taken the market nowhere, as we have not had two up days in a row on the S&P 500 since early February. Mostly because uncertainty abounds and the market trades on any shred of news or noise that’s associated with Fed policy, economic surprises on the weak side, and earnings which have dropped into negative territory. However, two of the more timely and leading economic indicators—both of which saw better readings upon their most recent releases—are Markit’s composite purchasing managers index (PMI) and initial unemployment claims. Some next-level leading indicators have been signaling a turn for the better as well. We reaffirm our view that although the secular bull market that began in 2009 is not over; it’s likely to be a much choppier ride for investors until possibly earnings can catch back up to valuations.

Other items set for release on tomorrow’s domestic docket include ADP’s March private sector employment report, forecasted to display job growth of 225,000 for the month, construction spending, expected to show a 0.1% m/m decrease for February following the 1.1% m/m decline posted in January, and the weekly MBA Mortgage Applications report.

European stocks pare strong quarterly gains, Asia mixed to close out the quarter

The European equity markets finished lower, with the Stoxx Europe 600 Index paring some of its sharp quarterly rally. As noted in the Schwab Market Perspective: Will a Spring Thaw Lead to a Stock Surge?, the improvement in economic data combined with the European Central Bank’s quantitative easing (QE) announcement has appeared to help ignite interest in European equities from U.S. investors, and pushed Europe’s stocks back to all-time highs. Though, from the perspective of U.S. investors, in dollar terms the index still has a way to go to make a new high. Read more at Oil & gas stocks remained hamstrung, as the persistent pressure on crude oil prices continues, exacerbated by renewed oil supply concerns as Iranian nuclear talks, which could result in eased international sanctions and allow more crude oil to hit the markets.

In economic news, German retail sales declined by a smaller amount than expected for February, while U.K. 4Q GDP growth was revised higher to a 0.6% quarter-over-quarter pace of expansion. Also, the eurozone consumer price inflation estimate of a 0.1% y/y decline for March matched expectations, and was a slight improvement from the 0.3% decline posted in February. In other news, the eurozone unemployment rate came in at 11.3% for February, from the upwardly revised 11.4% in January, and compared to the 11.2% rate that was forecasted.

Stocks in Asia finished mixed amid some potential posturing to close out the quarter that has seen rallies in Japan and mainland China. Japanese equities fell, paring a double-digit quarterly gain for the Nikkei 225 Index, ahead of tonight’s 1Q Tankan survey, a key read on business conditions among the nation’s large manufacturers. Chinese stocks erased early gains that came from the announcement from the People’s Bank of China to lower the required down payment for second homes to 40% from 60%, while easing sales taxes for select homeowners.

The Shanghai Composite Index has rallied about 16.0% for the quarter, per Bloomberg, led by optimism that the government stands ready to deploy further stimulus measures to combat slowing economic growth. In Australia, a rebound in resource-related issues helped recover yesterday’s losses. South Korean equities advanced on the heels of a much stronger-than-expected rise in the nation’s industrial production for last month.

Economic News of The Day

U.S. consumer confidence surges in March on short-term outlook

An index that measures consumer confidence surged in March because Americans think the economy will get better over the next six months, though they are a bit less sure about right now. The consumer confidence index climbed to 101.3% in March from an upwardly revised 98.8 in February, the Conference Board said Tuesday. Economists polled by MarketWatch had projected the index to total 96.9. The present situation index, a measure of current conditions, actually fell to 109.1 from 112.1. Yet the future expectations index increased to 96.0 from 90. “This month’s increase was driven by an improved short-term outlook for both employment and income prospects; consumers were less upbeat about business conditions,” said Lynn Franco, director of economic indicators at board.

Chicago PMI edges up to 46.3 in March

The Chicago business barometer — also known as the Chicago PMI — rose to a reading of 46.3 in March from 45.8 in February, MNI Indicators said Tuesday. That keeps the indicator below the 50 line marking contraction for the second month in a row.

U.S. home prices steady in January, Case-Shiller data shows

U.S. house prices were steady in January, according to the S&P/Case-Shiller 20-city composite released Tuesday, with Charlotte, Miami and San Diego all seeing gains of 0.7% while San Francisco prices fell 0.9%. On a seasonally adjusted basis, prices grew 0.9%. Compared to Jan. 2014, prices were up 4.6%. “The combination of low interest rates and strong consumer confidence based on solid job growth, cheap oil and low inflation continue to support further increases in home prices,” said David M. Blitzer, chairman of the index committee for S&P Dow Jones Indicies, in a statement.

Fed’s Lacker sees ‘strong’ case for June rate hike

Jeffrey Lacker, the president of the Richmond Fed, said Tuesday that he expects solid growth and rising inflation this year, and as a result, would urge the U.S. central bank to start raising interest rates relatively soon. “I expect that, unless incoming economic reports diverge substantially from projections, the case for raising rates will remain strong at the June meeting,” Lacker said in a speech prepared for delivery to the Greater Richmond Chamber of Commerce. Lacker, one of the most hawkish Fed presidents and a voting member of the Fed policy committee this year, has been supporting a June move since the turn of the year. The Richmond Fed president said the key to his outlook is an expected pickup in consumer spending supported by healthy income growth. He said he was looking past some of the unexpectedly weak economic data seen in recent weeks and said the strong dollar and lower energy prices were temporarily holding down inflation.

Market Insight 3/30/2015

Stocks Start Short Week with Big Gains

The U.S. equity markets began the holiday-shortened week with sizable gains as a healthy dose of M&A action was delivered from the pharmaceutical sector. Treasuries were mixed following a divergent read on domestic personal income and spending, which was followed by a solid gain in pending home sales and an unexpected drop in regional manufacturing activity. Gold and crude oil prices were lower, while the U.S. dollar was higher.

The Markets…

The Dow Jones Industrial Average ascended 264 points (1.49%) to 17,976

The S&P 500 Index was 25 points (1.22%) higher at 2,086, all 10 S&P 500 sectors moved higher with Energy the biggest gainer adding on 2.15% followed by Financials +1.46% and Industrials 1.40%.

Small and MidCaps enjoyed the rally as well with the SmallCap 600 adding on 1.20% and the MidCap 400 gained 1.41%.

The Nasdaq Composite jumped 56 points (1.15%) to 4,947

In moderate volume, 667 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil slid $0.18 to $48.68 per barrel, wholesale gasoline was unchanged at $1.80 per gallon

The Bloomberg gold spot price decreased $12.75 to $1,185.80 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.7% to 98.01

Personal income and spending mixed to begin the week

Personal income rose by 0.4% month-over-month in February, above the Bloomberg forecast of a 0.3% gain, while January’s 0.3% rise was revised to a 0.4% increase. Personal spending ticked 0.1% higher m/m, versus expectations of a 0.2% increase, while January’s 0.2% decline was unadjusted. The February savings rate as a percentage of disposable income rose to 5.8% from the unrevised 5.5% posted in January.

Pending home sales grew 3.1% m/m in February, versus the projected 0.3% gain, and following the downwardly revised 1.2% rise registered in January. Compared to last year, sales were 12.0% higher last month, versus the 8.7% rise that was anticipated. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose in February.

The Dallas Fed Manufacturing Index showed the contraction in activity for the region unexpectedly accelerated, falling to -17.4 for March—matching April 2013′s low—from February’s -11.2 level and compared to the forecasted -8.8 figure. A reading below zero denotes contraction.

Treasuries were mixed, with the yields on the 2-year and 10-year notes declining 1 basis point to 0.58% and 1.95%, respectively, while the 30-year bond rate was 1 bp higher at 2.55%.

The U.S. economic calendar will present more housing data tomorrow with the release of the S&P/Case-Shiller Home Price Index, expected to show home prices in the 20-city composite rose 4.6% y/y during January and 0.7% m/m on a seasonally adjusted basis. Also on tap tomorrow, the Chicago Purchasing Manager Index is anticipated to push back into expansion territory with a reading of 51.8 in March from a level of 45.8 in February, with 50 the demarcation point between expansion and contraction in regional business activity. Rounding out the day we’ll receive Consumer Confidence, forecasted to remain at February’s level of 96.4 for March.

Europe and Asia mostly higher

The European equity markets finished higher, with global sentiment getting a boost as late-Friday’s speech from Fed Chairwoman Yellen that did not exacerbate rate-hike concerns was met with comments out of China’s central bank that suggested it will do more to combat a slowing economy. Also, a larger-than-expected improvement in eurozone business confidence for March underpinned the positive tone in the markets, with the index hitting the highest level in 3 ½ years. Greece remained in focus, with the nation continuing to hold talks with its international creditors to discuss necessary reform plans, while the deadline to continue to receive bailout aid is approaching. In other economic news, German consumer price inflation rose more than expected this month.

Stocks in Asia finished mostly to the upside as weakness in oil & gas issues were overshadowed by optimism of further Chinese stimulus measures. Chinese equities rallied and Hong Kong issues advanced after the governor of the People’s Bank of China warned that the nation’s growth slowdown has been “a bit” too strong but noted that the central bank has scope to respond, per Bloomberg. Japanese stocks overcame early losses that stemmed from a larger-than-expected drop in the country’s industrial production for February, while South Korean equities also showed some resiliency, advancing in the face of a decline in manufacturing sentiment for April. Australian stocks were led lower by weakness in oil & gas issues as crude oil prices remained under pressure.

The international economic docket for tomorrow will include construction orders, vehicle production and housing starts from Japan, retail sales and unemployment data from Germany, GfK consumer confidence, GDP and business investment from the U.K. and the CPI for Italy and the eurozone.

Market Insights 3/27/2015

Stocks Finish Negative Week in Positive Fashion

Though stocks did close out the week lower, the U.S. equity markets managed to produce a positive finish today as Fed Chairwoman Janet Yellen discussed in an afternoon speech factors that will likely guide the Fed’s decisions in adjusting its stance of monetary policy over time.

Treasuries were higher following an inline read on 4Q GDP growth and a stronger-than-expected revision to March consumer sentiment. Crude oil prices gave back the boost they received yesterday following the intensified tensions in the Middle East, while gold and the U.S. dollar were also lower.

The Markets…

The Dow Jones Industrial Average gained 34 points (0.20%) to 17,713

The S&P 500 Index gained 5 points (0.24%) to 2,061, 7 of the 10 S&P 500 sectors were higher with HealthCare +.72% and Utilities .60% leading the way with Consumer Staples +.62% and Industrials +.58% also having good days. Energy -.82% and Fiancials -.13% provided the drag.

Small and MidCaps outpaced LargeCaps with the MidCap 400 higher by .45% and the SmallCap 600 was better .53%.

The Nasdaq Composite increased 28 points (0.57%) to 4,891

In moderate volume, 739 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil declined $2.56 to $48.87 per barrel, wholesale gasoline fell $0.08 to $1.80 per gallon

The Bloomberg gold spot price moved $7.02 lower to $1,197.79 per ounce

The U.S. dollar to six major world currencies—dropped 0.2% to 97.29

Markets were lower for the week, as the DJIA decreased 2.3%, the S&P 500 Index dropped 2.2%, and the Nasdaq Composite Index tumbled 2.7%

Final look at 4Q GDP unrevised, while consumer sentiment revised higher

The final look (of three) at 4Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 2.2%, unrevised from the expansion reported in the second report. This compared to the upwardly adjusted 2.4% increase that was forecasted by economists surveyed by Bloomberg. 3Q GDP expanded by an unrevised 5.0%. Personal consumption matched forecasts at a 4.4% gain for 4Q, from the 4.2% increase that was previously reported. Personal consumption grew by an unrevised 3.2% in 3Q.

On inflation, the GDP Price Index held at a 0.1% increase, inline with economists’ expectations, while the core PCE Index, which excludes food and energy, was unrevised at a 1.1% increase, meeting forecasts.

The final University of Michigan Consumer Sentiment Index was revised higher to 93.0 for March from the preliminary level of 91.2, and versus an expected 92.0, but was below the 95.4 posted in February. Both components pertaining to current economic conditions and economic outlook were revised higher, but were down versus February. The 1-year and 5-year inflation projections were unrevised at 3.0% and 2.8%, respectively. February’s 1-year and 5-year inflation expectations were 2.8% and 2.7% respectively.

Treasuries were higher, with the yield on the 2-year losing 2 basis points to 0.59%, the yield on the 10-year note declining 4 bps to 1.95% and the 30-year bond rate falling 6 bps to 2.53%.

Fed Update:

In the final hour of Friday trading, Federal Reserve Chairwoman Janet Yellen channelled her inner-Mary Poppins, giving markets a spoonful of sugar while delivering the message that an increase in interest rates could come soon. But then reversed course and said any change in rates is subject to the latest economic data.

“I expect that conditions may warrant an increase in the federal funds rate target sometime this year,” Yellen told a conference sponsored by the San Francisco Fed. But Yellen stressed several times that the Fed would be cautious and subsequent rate hikes would likely to be gradual.

Yellen, for the first time, said that the Fed would stay on hold if there were further weakening in key inflation indicators. But she added that it would not take an increase in inflation or wages to prompt the Fed to raise interest rates.

European stocks diverge after seeing solid declines, Asia mixed to close out the week

The European equity markets finished mixed, in the wake of two-straight sessions of losses, with attention being paid to the escalated tensions in the Middle East after Saudi Arabia and its Gulf allies launched military action against rebel forces in Yemen. Meanwhile, European Central Bank President Mario Draghi noted that he is confident that the ECB’s quantitative easing campaign will reach its monthly purchases target, despite a shortened first month of purchases, per Bloomberg. In economic news, German import prices rose more than expected, Italian industrial orders fell and the nation’s retail sales rose modestly to match expectations, while U.K. home prices missed estimates and French consumer confidence improved modestly.

The U.K. FTSE 100 Index was down 0.6%, Germany’s DAX Index gained 0.2%, France’s CAC-40 Index advanced 0.6%, Italy’s FTSE MIB Index rose 0.4%, Spain’s IBEX 35 Index declined 0.2%, and Switzerland’s Swiss Market Index finished flat.

Stocks in Asia finished mixed on the heels of the declines in the U.S. and Europe yesterday as the intensified turmoil in Yemen and festering Fed rate-hike uncertainty weighed on conviction. Japanese equities fell despite some weakness in the yen, as some disappointing February economic data dampened sentiment. Japan’s consumer price inflation came in cooler than expected and retail sales fell more than anticipated, overshadowing a smaller-than-forecasted drop in the nation’s household spending.

Stocks in China continued their recent rally after overcoming early losses, while a report showed the country’s industrial profits fell in the first two months of the year. Industrial companies led the advance despite the data, getting a boost from the government signaling it will accelerate infrastructure projects to reduce overcapacity, per Bloomberg. Australian stocks finished higher, despite some softness in resource-related issues, led by strength in healthcare and technology stocks.

Stocks back in the red as all eyes remain on the Fed

After snapping a weekly losing streak last week, courtesy of the Fed’s surprisingly dovish tone, stocks returned to the red for the week. Data was on the light side, vectoring the attention to heightened Fed rate-hike uncertainty, and the ensuing volatility in the bond, currency and commodities markets, exacerbated by escalated tensions in the Middle East.

The domestic economic calendar did little to help clear up the Fed uncertainty, with upbeat Markit business activity reports and a jump in new home sales being accompanied by another unexpected decline in durable goods orders. As a result, traders appeared to take some gains off the table to the detriment of technology and biotech stocks, which were noticeable decliners.

With Fed rate uncertainty high, labor report set to be released on a holiday

Although the stock markets will be closed and the bond markets trading in an abbreviated session in observance of the Good Friday holiday, the Labor Department will still release the March nonfarm payroll report, with Fed rate hike uncertainty running high. Ahead of next weeks Friday’s job report, the ISM Manufacturing Index will be released on Wednesday, along with Markit’s final Manufacturing PMI Index, giving us a good read on domestic manufacturing output for this month.

U.S. stocks have struggled to regain upward momentum, but a rebound in economic activity should help. Valuations are somewhat extended, which could make further gains tougher to come by.

The U.S. Economy Loves Spring

The latest reports on the U.S. economy have not been good. Growth seems to have stalled in the first quarter of the year.

Should we be worried that this slump in the economy will become the new normal? Probably not. In an economy as complex as ours, something or other is constantly happening to speed up or slow the sales of goods and services. In the first quarter, we got a storm of bad news, but it’s not likely to last because the economy has a lot of forward momentum.

What happened in the first three months of the year? The most populous part of the country was hit by very cold and very snowy weather, depressing all kinds of activity, from housing to manufacturing. The dollar strengthened significantly, hurting big companies that compete globally. And oil prices collapsed, leading to a huge decline in investment in the oil patch.

But this malaise won’t hang around forever. Here are three things that will pull the economy out of this slow patch.


Some, but not all, of the weakness in the economy was simply a result of the cold weather. The only way to fix that is to have warmer weather. Lots of people pooh-pooh the idea that the weather could have a big impact on the national economic stats. After all, it snows every winter!

But the fact is: Activity slows even in a mild winter. People tend to stay home. They miss work, they don’t go out to eat as much, and they don’t go shopping. Some activities, such as breaking ground on a new home, require relatively warm and dry conditions. Shipping requires roads, railways, airports, seaports and rivers to be open.

The economic data are seasonally adjusted to take the normal seasonal variations into account. But when the weather is extreme, the impact of the weather can be seen.

Researchers at the Chicago Fed found that weather can have a significant, but temporary, impact on economic indicators such as retail sales, the unemployment rate, the average workweek, utility output, housing starts, and new orders and shipments of manufactured goods.

February was colder than usual, and most of the cold was concentrated east of the 100th meridian, where most of the people live.

That cold (and the accompanying snow) in the East had an impact on the economy: The number of people who couldn’t work in February (during the survey week) was 13% higher than normal, and the number who had their hours cut back to part time was 37% higher than normal.


Consumers received a huge windfall as energy prices plunged, but they’ve saved it rather than spent it. Real incomes (adjusted for falling prices) have risen at a 7.7% annual rate over the past three months, but real spending has grown only half as fast. The savings rate ballooned to 5.5% in January, up from 4.5% in the autumn.

It’s no surprise that consumers would save the windfall, at least initially. When hit by a shock such as a large decline in energy prices, consumers typically adjust their spending very slowly. They aren’t quite sure if the change is going to persist. It usually takes six months or so for spending patterns to adjust.

Oil prices started to decline in June of last year, but it accelerated in October and November. That means consumers should be ready to loosen up their wallets in the next few months. Spending should rise and the savings rate should fall back into the 4% to 5% range.

Incidentally, households are in good shape to spend a little more money. Incomes are rising: More people are working, and their weekly pay is rising. Consumer confidence is higher than it’s been in years. Consumers have also worked down their debts considerably. They are paying just 9.9% of their income on servicing debt, the lowest on record (dating to 1980). Some people are constrained by debt, but most aren’t.

Small Businesses

Large businesses are being squeezed by the strong dollar DXY, +0.01% which makes U.S. exports more expensive and foreign imports cheaper. But smaller businesses are less exposed to global competition and should do relatively better.

After years of unrelenting pessimism, smaller businesses have finally turned optimistic, according to the monthly survey of the National Federation of Independent Businesses, a leading lobbying group for small business. Small businesses are hiring more and they are investing in capital equipment and buildings. They are ready to take the baton from the large businesses that have been thriving.

Much of the decline in capital spending by large businesses is directly due to the collapse in oil prices. Oil companies are turning off the drills and shutting down production in fields where it’s expensive to extract oil.

Economist report that investments in mining structures (oil and gas wells) are falling at a 60% annual pace. But that adjustment will be quickly concluded, and the drag to GDP from falling investment will end by summertime.

The strong dollar will continue to be a drag on exports, and thus on the manufacturing sector. But that drag will be more than offset by the boost from cheaper energy. No one can be certain what further shocks await, but, most likely, this winter’s slump, in our opinion, will be just another bump in the road to a continued recovery.

Market Insights 3/26/2015

Equities Recover From Lows, but Still See Negative Close

The U.S. equity markets pared early losses, but still closed the trading session below the flatline. Some of the early pressure on stocks arose from flaring Middle East concerns with Saudi Arabia and its Gulf allies launching airstrikes on rebel forces in Yemen. The actions were followed by a rally in crude oil prices, while the U.S. dollar and gold were also higher.

Treasuries were lower on the heels of upbeat reads on domestic jobless claims and services sector activity, while a separate release from the domestic docket showed a contraction in Midwest manufacturing activity.

The Markets…

The Dow Jones Industrial Average declined 40 points (0.2%) to 17,678

The S&P 500 Index was 5 points (0.2%) lower at 2,056, sectors were mostly lower with Materials and Technology higher and the others 8 sectors lower led by Utilities and Consumer Discretionary.

Small and MidCaps traded with LargeCaps with the MidCap 400 losing .23% and the SmallCap 600 gave back .24%

The Nasdaq Composite lost 13 points (0.3%) to 4,863

In moderate volume, 817 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil gained $2.22 to $51.43 per barrel, wholesale gasoline increased $0.05 to $1.88 per gallon

The Bloomberg gold spot price climbed $8.40 to $1,203.88 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.4% to 97.35

Jobless claims decline more than expected, while services sector growth surprisingly accelerates

Weekly initial jobless claims decreased by 9,000 to 282,000 last week, below the 290,000 Bloomberg estimate, as the prior week’s figure was unrevised at 291,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 7,750 to 297,000, while continuing claims declined by 6,000 to 2,416,000, north of the forecasted 2,400,000 level.

The preliminary Markit U.S. Services PMI Index showed growth in the sector unexpectedly accelerated, rising to 58.6 in March from 57.1 in February, and compared to the dip to 57.0 that was anticipated, with a reading above 50 denoting expansion. This would be the strongest level since September 2014 and Markit said payrolls posted the fastest pace of expansion in nine months, while confidence toward the business outlook eased to the lowest since June 2012.

The Kansas City Fed Manufacturing Activity Index showed activity in the Midwest region unexpectedly shrank in March, falling to -4 from 1 in February, where economists had expected it to remain, with a reading below zero depicting contraction.

Treasuries were lower, with the yield on the 2-year note ticking 1 basis point higher to 0.61%, while the yields on the 10-year note and the 30-year bond rose 8 bps to 2.00% and 2.59%, respectively.

Tomorrow, the U.S. economic calendar will be headlined by the final of three reads on 4Q GDP. Domestic output is forecasted to be revised to a quarter-over-quarter growth rate of 2.4%, up from 2.2% in the second revision, while personal consumption is expected to be adjusted to 4.4% growth from the 4.2% rise previously reported. On inflation, the GDP Price Index and the core PCE Index are both expected to remain at growth rates of 0.1% and 1.1%, respectively. We will also receive the final University of Michigan Consumer Sentiment Index for March, with economists forecasting a reading of 92.0, up from the 91.2 posted in the month prior.

Europe sees red on hamstrung global sentiment, Asia mostly lower

The European equity markets finished broadly lower, with the global markets coming under some pressure amid U.S. Fed rate-hike uncertainty, and the ensuing volatility in the currency markets. Escalated tensions in the Middle East, courtesy of the news that Saudi Arabia and its allies in the Gulf region launched airstrikes against rebel forces in Yemen, exacerbated sentiment. The uneasy global sentiment was limited on oil & gas issues as crude oil prices rose on the intensified tensions.

Greek stocks fell as the time frame to secure continued bailout aid is narrowing, with its international creditors waiting to see if it can deliver acceptable reform plans. In economic news, German consumer confidence improved more than expected for April, France’s 4Q GDP growth was unrevised at a 0.1% quarter-over-quarter pace of growth, as expected, while U.K. retail sales came in stronger than expected for February.

Stocks in Asia finished mostly lower following the sharp declines in the U.S. yesterday, with technology stocks leading the way, while oil-related issues gained ground as crude oil prices rallied, bolstered by the escalated conflict in Yemen following the airstrikes by Saudi Arabia. Japanese equities fell, with the yen strengthening to pressure export-related stocks. Pressure on Indian stocks was exacerbated by some volatility on the last trading session ahead of the expiration of options and futures contracts in the nation.

Australian issues were led lower by weakness in banking stocks, and South Korean equities declined following some lackluster consumer confidence and inflation data. However, mainland Chinese stocks managed to outperform, after snapping a string of ten-straight winning sessions yesterday, amid the strength in the oil sector. After the closing bell, Hong Kong reported its exports rose more than expected for last month.

The Fed’s Five-Year Plan to Get Back to “Normal”

One little word, or its absence, got all the attention at last week’s meeting of the Federal Open Market Committee (FOMC). By removing “patient” from its official statement, the Federal Reserve’s rate-setting body seemed to indicate it was preparing to hike the federal funds rate over the coming months.

But in their obsession with exactly when the Fed will raise rates again, Wall Street and the financial media are missing the point: It doesn’t matter whether the Fed starts raising short-term rates in June or September or even early next year. What does matter is that the Fed is moving slowly, deliberately to end rock-bottom-low interest rates and reduce the massive holdings of government and mortgage debt it accumulated since the financial crisis.

In fact, Chairwoman Janet Yellen and other prominent Fed officials have laid out a clear path to a more “normal” monetary environment. It may take several years, and when they’re done, it will be a “new” normal, with peak rates below where they once were. But they’re well on their way.

At WT Wealth Management we feel it’s the same playbook we’ve been on for some time, the Federal Reserve is trying to get back to something more normal. Tradiationally there has been a 300-400 sp[read betwen the 10 year and the fed funds rate. Today it is less than 200 bps. If the economy rolled over and slowed down the Fed has fewer bulletts in their gun to stimulate growth with the spread so tight.

The plan, which probably began under former Fed Chair Ben Bernanke (whose last vice chair was Janet Yellen) has been, first, to phase out the central bank’s extraordinary bond buying of Treasuries and mortgage-backed securities (called quantitative easing, or QE); then, to start raising the fed funds rate again, and finally, to shrink the Fed’s bloated balance sheet after several rounds of QE.

Phase one — ending QE — is complete. We’re moving into phase two, rate increases. Phase three will probably occur naturally as the Fed’s bond holdings mature, and may take more than five years.

When the Fed is done, I suspect the fed funds rate will be much lower than its previous peak of 5.25% in June 2006, and its balance sheet will be higher than the $850 billion before the crisis. (It’s more than $4 trillion now.) In fact, amid slower growth and subdued inflation, we feel the FOMC is likely to stop at a 3 1/2% to 3 3/4% fed funds rate. That’s traditionall their vision of normal, though they may bring it down further.

Plus, Fed officials have suggested that when it starts raising rates, it won’t hike them quickly. A smooth path upward in the federal funds rate will almost certainly not be realized, because, inevitably, the economy will encounter shocks. Translation: We’re taking our time. Deal with it.

They’re certainly not going to be raised 25 basis points each meeting as they did in the past. We feel that there’s no chance for that to happen. Reduction of the Fed’s bond holdings also won’t begin in earnest until short-term rates rise, because reducing bond holdings is another form of tightening.

But top officials are already hinting how that will happen. When the time comes, we plan to normalize the balance sheet primarily by ceasing reinvestment of principal payments on existing holdings. When the FOMC chooses to cease reinvestments, the balance sheet will naturally contract, with a corresponding reduction in reserve balances.

At her press conference last week, Yellen said: “I think over the next two years almost $800 billion will mature, and that they will be short-term, obviously, Treasuries at that point, and that’s a way in which we anticipate diminishing the size of our portfolio.”

Of course, taking their time has its pitfalls. St. Louis Fed President James Bullard warned this week that keeping rates near zero heightens the risk of asset bubbles. By waiting too long, the Fed could fall behind the curve on inflation, if and when that ever shows up again. Unexpected economic weakness could delay its move back to “normal” even further.

But barring that, the Fed is on a clear path to raising rates and reducing its balance sheet. That’s the big picture long-term investors need to understand; the rest is just noise.

Market Insights 3/25/2015

Equities Sink

The U.S. equity markets added to their recent losses as stocks closed the trading session sharply lower following an unexpected decline in durable goods orders and continued uncertainty with regards to when the Fed will begin down the path of normalizing monetary policy.

Treasuries were lower, though a separate release from the economic calendar showed weekly mortgage applications rose. The U.S. dollar was lower, while gold and crude oil prices advanced.

The Markets…

The Dow Jones Industrial Average declined 293 points (1.6%) to 17,718

The S&P 500 Index was 30 points (1.5%) lower at 2,061, 8 of the 10 S&P 500 sectors finished lower with Energy and Consumer Staples the lone sectors moving higher, technology was the biggest loser on the day giving 1.75% followed by Financials and Consumer Discretionary.

The Nasdaq Composite lost 118 points (2.4%) to 4,877

In moderately heavy volume, 774 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil gained $1.70 to $47.51 per barrel, wholesale gasoline increased $0.03 to $1.83 per gallon

The Bloomberg gold spot price climbed $2.22 to $1,195.50 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—decreased 0.3% to 96.93

Durable goods orders miss, while mortgage applications jump

Durable goods orders dropped 1.4% month-over-month in February, compared to the Bloomberg estimate of a 0.2% increase, while January’s 2.8% rise was revised lower to a 2.0% gain. Ex-transportation, orders declined 0.4% m/m, versus the forecast of a 0.2% gain, while January’s figure was negatively revised to a 0.7% decrease. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 1.4%, compared to the projected 0.3% increase, and following the downwardly revised 0.1% dip in the month prior, from an initially reported gain of 0.6%. The report, which is historically volatile, was bogged down by a sharp drop in aircraft orders, along with solid declines in orders for manufacturing, machinery and fabricated metal products, though demand for electrical equipment and appliances, as well as communications equipment, was nicely higher.

The MBA Mortgage Application Index jumped 9.5% last week, after dropping 3.9% in the previous week. The strong rise came as a 12.3% surge in the Refinance Index was accompanied by a 4.9% increase for the Purchase Index, with the average 30-year mortgage rate falling 9 basis points to 3.90%.

Treasuries were lower, with the yield on the 2-year note increasing 1 bp to 0.59%, the yield on the 10-year note rising 5 bps to 1.92% and the 30-year bond rate ticking 4 bps higher to 2.51%.

Tomorrow, the U.S. economic calendar will yield the release of the latest weekly initial jobless claims report, expected to tick slightly lower to a level of 290,000 from the 291,000 registered the week prior. Shortly after the opening bell, we will receive Markit’s preliminary Services PMI Index, expected to inch lower to a level of 57.0 for March from the 57.1 announced in February. Rounding out the day will be the Kansas City Fed Manufacturing Index, with economists expecting no change from the previous level of 1 for March, with a level above zero denoting expansion in manufacturing activity in the Midwest region.

Europe declines despite upbeat German data

The European equity markets finished lower following the disappointing U.S. durable goods orders report. Global sentiment lacked catalysts for conviction, while traders continued to grapple with rate-hike uncertainty in the U.S., which is causing some volatility in the currency and commodities markets. The Stoxx Europe 600 Index retreated somewhat from its recent rally that has taken it to near record high territory, despite a favorable read on German business confidence, as the euro gained ground on the U.S. dollar. Germany’s Ifo Business Climate Index, a survey of 7,000 executives, improved to 107.9 in March, from 106.8 in February, and compared to the 107.3 level that economists had projected. In other economic news, French business confidence improved more than expected for this month, though a separate read on the nation’s manufacturing confidence came in below forecasts.

Stocks in Asia finished mixed as yesterday’s declines in the U.S. hamstrung conviction. Japanese equities overcame early losses and finished higher with data on the light side, while the yen recovered some of yesterday’s weakness. China’s Shanghai Composite Index snapped its 10-session winning streak that was the longest in 23 years, per Bloomberg, as concerns about earnings pressured sentiment. In Australia, strength in banking stocks slightly outweighed weakness in resource-related issues, while South Korean equities managed to eke out a gain after a report showed the nation’s 0.4% quarter-over-quarter 4Q GDP growth was revised to a 0.3% pace of expansion.

International releases slated for release tomorrow will include the GfK Consumer Confidence report from Germany, GDP from France and retail sales from the U.K.

Fed Won’t Hand Hold Forever

Investors are feeling flush and happy after last week’s Federal Reserve meeting offered reassurances that the central bank won’t move aggressively to hike interest rates. Stocks responded with a huge move higher, leaving the S&P 500 and other major indexes not far off record highs.

But don’t get too comfortable.

The launch of a new rate-hike cycle means that the Federal Reserve’s hand-holding can’t continue forever. For now, it’s taking care to spoon feed market participants a reassuring gruel: Sure, the Fed has dropped “patient” but that doesn’t mean the central bank is “impatient,” as Chairwoman Janet Yellen emphasized.

At some point, however, the Fed will hike rates, and in the run-up to the move, the seeming confidence inspired by the central bank’s willingness to cautiously flag every future move is likely to take a hit. After the first hike, the pace and trajectory of future tightening moves will likely become less certain, rate watchers say.

The problem is that investors have become accustomed to a Fed that bends over backward to offer forward guidance and transparency. The Fed itself seems a little gun shy after the market-shaking 2013 “taper tantrum” that followed then-Chairman Ben Bernanke’s hint that the central bank was ready to begin winding down the last iteration of its quantitative-easing program.

But such a fully transparent Fed isn’t the new normal.

The Fed’s most recent signal is a function of the bizarre world that’s prevailed in the aftermath of the financial crisis. One thing it isn’t, however, is “normal. We feel the Fed’s various forms of quantitative easing and other extraordinary measures have required policy makers to emphasize certainty in an uncertain world.

In order for those measures to work, the Fed had to convince investors that the programs were “inviolable, and certain to transpire even if the data shifted. What people have perhaps forgotten is that telegraphing its moves and committing so forcefully to new policies were never “normal” practices for the Fed.

So although investors are acting relatively certain, things aren’t so “etched in stone’. In fact, Fed Vice Chairman Stanley Fischer warned in a Monday speech that projections for interest rates to rise smoothly and steadily after the initial hike almost certainly won’t be borne out.

That’s because the economy is almost guaranteed to encounter shocks—”shocks like the unexpected decline in the price of oil, or geopolitical developments that have major budgetary and confidence implications, or a burst of greater productivity growth, as the Fed dealt with in the mid-1990s and countless times before.

That means there is a degree of uncertainty surrounding the level of future interest rates that can be estimated statistically and that should be taken into account by market participants and recognized by the Fed when it discusses the future level of interest rates.

In other words, the Fed isn’t out to abolish uncertainty, though it might want to find a better way to quantify it. No doubt, figuring out how to get back to a more normal level of uncertainty appears to be causing some sleepless nights among policy makers.

But in fact, central bank policy under normal conditions is “’uncertain’ and not on a preset course because central bankers need to be more flexible. Dropping ‘patient’ achieves two aspects of normalization—it reintroduces uncertainty, and it sets the stage for positive nominal policy interest rates.

The bottom line is that when it comes to Fed policy, investors would do well to remember that the return of uncertainty isn’t a bug, it’s more of a feature.

Market Insights 3/24/2015

Stocks Close in the Red, Interest Stays with the Fed

After moving back and forth between positive and negitive ground for much of the trading session, the U.S. equity markets closed lower on lighter volume with traders weighing when the Fed will make its move on interest rates.

Treasuries were higher as details delivered from the domestic docket displayed some divergent manufacturing data, a surge in new home sales and consumer price inflation that was inline with expectations. Crude oil prices were mixed, while the U.S. dollar and gold were higher.

The Markets…

The Dow Jones Industrial Average declined 105 points (0.6%) to 18,011

The S&P 500 Index was 13 points (0.6%) lower at 2,092, all 10 sectors ended the day lower with Utilities -1.11% and HealthCare the largest losers.

Small and MidCaps outperformed largecaps with the MidCap 400 losing .41% and the SmallCap 600 eeking out a.02% gain in light trading.

The Nasdaq Composite lost 16 points (0.3%) to 4,995

In moderately light volume, 744 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.06 to $47.51 per barrel, wholesale gasoline was unchanged at $1.80 per gallon

The Bloomberg gold spot price climbed $4.34 to $1,193.88 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.1% to 97.13

New home sales jump, CPI meets forecasts

New home sales increased 7.8% month-over-month in February, to an annual rate of 539,000 units from January’s upwardly revised 500,000 unit pace, and compared to Bloomberg’s forecast of a 464,000 rate. The median home price rose 2.6% y/y to $275,500, but was down 4.8% m/m. The supply of new home inventory declined to 4.7 months at the current sales pace. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings.

The Consumer Price Index (CPI) was up 0.2% month-over-month in February, matching the Bloomberg forecast, while January’s 0.7% decrease was unrevised. The core rate, which strips out food and energy, rose 0.2% m/m, compared to the projected 0.1% rise, and January’s 0.2% gain was unadjusted. Y/Y, prices were flat for the headline rate, compared to the 0.1% dip that was forecasted, while the core rate was 1.7% higher, inline with expectations. January’s y/y figures showed an unrevised decline of 0.1% and an unadjusted 1.6% rise for the headline and core rates respectively.

The preliminary Markit U.S. Manufacturing PMI Index for March unexpectedly accelerated to 55.3 from February’s 55.1 level, and compared to the decrease to 54.6 that economists had expected, with a reading above 50 denoting expansion. The release is independent and differs from the Institute for Supply Management’s (ISM) Manufacturing Index, as it has less historic value and Markit weights its index components differently.

Treasuries were higher, with the yield on the 2-year note decreasing 1 basis point to 0.56%, the yield on the 10-year note losing 4 bps to 1.87% and the 30-year bond rate declining 6 bps to 2.46%.

Tomorrow, the U.S. economic calendar’s spotlight will be focused on the volatile durable goods orders report, which is projected show the headline figure ticked 0.2% higher m/m in February, after increasing 2.8% in January. Excluding transportation, orders are anticipated to rise 0.2%, following January’s 0.3% upturn, while nondefense capital goods orders excluding aircraft—a gauge of business spending—are estimated to increase 0.3%, on the heels of the prior month’s growth of 0.6%.

Europe mostly higher, Asia mixed

The European equity markets finished to the upside on the heels of a favorable read on eurozone business activity for March. Markit’s Eurozone Composite PMI Index—a gauge of activity out of both the services and manufacturing sectors—improved to 54.1 from 53.3 in February, and compared to the slight increase to 53.6 that economists had projected, with a reading above 50 denoting expansion. This was the highest reading since May 2011, per Bloomberg, led by accelerations in German manufacturing and services sector output, while French services sector activity topped forecasts.

Also, Greek debt talks remained in focus, with a government official telling Reuters that the nation will present its reform plans, which are necessary for the country to continue to receive bailout aid, to its eurozone counterparts by next Monday. However, gains in the region were pared amid some weakness in airline stocks on news that a Germanwings Airbus A320 passenger plane, carrying reportedly 150 people, crashed in southern France. In other economic news, U.K. consumer price inflation came in cooler than expected y/y for February, hitting a record low.

Stocks in Asia finished mixed as traders digested a disappointing read on Chinese manufacturing activity. HSBC’s preliminary China Manufacturing PMI Index declined to 49.2 in March from 50.7 in February, and compared to the 50.5 level that economists had projected, with a reading below 50 denoting contraction. China’s Shanghai Composite Index erased an early drop that followed the report—the lowest in 11 months—ticking higher to extend its winning streak to ten sessions, as the softer-than-expected manufacturing report boosted optimism regarding further stimulus measures. This was the longest string of gains for mainland Chinese stocks in 23 years, per Bloomberg. Japanese equities declined on the heels of the Chinese data, which was accompanied by an unexpected deceleration in Japanese manufacturing growth for this month, and as the yen held recent gains.