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I'm sure you have seen Evergrande's name in the news this past week. Here is some information to help you understand...
By: Joe Maas, CFA, CFP®, CLU®, ChFC, MSFS, CCIM™, CVA, ABAR, CM&AA on Mar 8, 2021 1:00:00 PM
Overall, February was a very positive month for the markets as all the major domestic indices climbed higher, even though the 10-year Treasury’s basis points did also, suggesting the potential influence of coming inflation.
Major European and Asian markets also did well during the shortest month of the year. Crude oil jumped over +$10 per barrel and gasoline showed a +50 cent increase per retail gallon. Gold was down by over -$80 per ounce as the world’s national economies slowly began to open up after nearly a year of the COVID-19 onslaught.
10-Year Treasuries seemed to change its lengthy tune as the yield increased +29 basis points, rising to 1.40 from 0.94 at the start of the year, making a +33% YTD change by the end of February.
The Federal Open Market Committee (FOMC) released its January 26-27 meeting minutes in mid-February, with the following commentary reported by Forbes. “The minutes from the January FOMC meeting revealed that there’s still plenty of economic dislocation to cope with, as lockdowns and social distancing measures have not yet been lifted. If the impacts of Covid-19 continue to wane, then the economy will be poised to take off. Democrats have a decent shot of passing Biden’s $1.9 trillion stimulus package. This will put yet more money in the hands of Americans, on top of December’s stimulus. Buoyed by more money, and an eventual return to normalcy, Treasury rates have risen in recent weeks as investors move out of the ultra-safe asset and into securities, like equities, that promise a higher rate of return. Of course that has prompted some to worry about inflation, although Powell has promised to let prices rise modestly above the Fed’s 2% target before increasing borrowing rates. Fed officials project they won’t raise interest rates for years to come. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations,” read the Fed’s post-meeting statement. The economy has a long way to go before returning to full strength. The ability of the Fed to reach its goals depends largely on the nation’s ability to stymie the Covid-19 onslaught. Fewer people pulling in a paycheck, along with cheaper oil prices, helped push down inflation.” The next meeting of the FOMC is March 16 – 17.
Comex gold lost ground for the second month, falling -$84 per ounce from $1,854 at the end of January to $1,770 at the end of February, down -6.5% YTD. West Texas Intermediate Crude oil posted huge gains during February, rising +$10.81 per 42-gallon barrel to finally sit in the $60 price range for the first time in a long time with a month-end of $63.53 and an outstanding YTD of +23.7%. Similarly, a domestic gallon of retail gasoline had a national average price of $2.97, representing an increase of +55.1 cents over January and hitting consumers with a +27.4% YTD.
GDP: Based on data from the Bureau of Economic Analysis (BEA), MSNBC reported on February 25: “The economy grew at a 4.1% pace in the final three months of 2020, slightly faster than first estimated, ending a year in which the overall economy, ravaged by a global pandemic, shrank more than in any year in the past seven decades. The influx of new government stimulus efforts and accelerated vaccine distribution could lift growth in the current quarter, ending in March, to 5% or even higher, economists believe. The 4.1% gain in the gross domestic product — the broadest measure of economic health — is a slight upward revision from 4% growth in the first estimate released a month ago, the Commerce Department reported Thursday. As bad as 2020 was, it’s set the nation up for what economists believe will be a very strong rebound. Many project a growth rate of 5% or more in the current quarter or more, with 9% growth the headline in some forecasts.”
Job Growth: The latest situation data comes from the Bureau of Labor Statistics (BLS) in early February: “The unemployment rate fell by -0.4 percentage point to 6.3 percent in January, the U.S. Bureau of Labor Statistics reported today. The labor market continued to reflect the impact of the coronavirus (COVID-19) pandemic and efforts to contain it. In January, notable job gains in professional and business services and in both public and private education were offset by losses in leisure and hospitality, in retail trade, in health care, and in transportation and warehousing.”
According to a February 24 Forbes article referencing the Federal Open Market Committee, “In his post-meeting press conference, Fed Chair Jerome Powell said the real unemployment rate is probably closer to 10%. The broadest view of the unemployment rate, which takes into account people who work part-time but want full-time hours, as well as others marginally attached to the labor market, stands at 11.7%. Before the recession, that measure was 7%.”
Housing Sales: “Mortgage rates jumped meaningfully higher this week”, reported Zillow, the 15-year old online real estate market company, “accelerating the upward movements that have been brewing for weeks and started in earnest in mid-February. By some measures, rates rose this week at their fastest pace in years, and while they are still very low in historic terms, it appears that the days of record-low rates are a thing of the past. As usual, the jump in rates has been driven by movements in the U.S. Treasury market. The yield on the 10-year Treasury bill – which is most closely aligned with mortgage rates – has risen considerably this year and now sits at its highest level in a year. Several factors have contributed to this spike, chief among them the expectation that inflationary pressures will become stronger in the coming months causing the Federal Reserve to tighten monetary policy. The central bank has taken a series of aggressive steps since the pandemic began in an effort to ease the flow of money through the economy, including lowering benchmark interest rates to zero and purchasing billions of dollars’ worth of bonds. The latter step in particular has helped keep mortgage rates suppressed through the last year. Theoretically, if prices start to rise too much, the Fed would need to tighten the supply of money by raising rates and slowing bond purchases. Fed Chair Jerome Powell has insisted the central bank has no intention of tightening policy anytime soon and expects inflation to remain subdued in the coming year, but investors don’t appear to be buying it. The recent jump in mortgage rates is likely to slow, but a shift in investor outlook has pulled mortgage rates up – 30-year fixed mortgage rates are now 50 basis points (or half a percentage point) higher than they were at the beginning of February. While expectations for rising inflation appear to be the chief culprit for the sharply rising rates in the last couple weeks, the other factor driving rates upward is seemingly strong optimism in the state of the economy going forward.”
The new homes market is still in an accelerated state, according to Zillow: “Meanwhile, sales of new homes began 2021 right where they left off in 2020, near their highest levels in more than a decade and widely exceeding already optimistic expectations. As an added bonus, already strong numbers from prior months were revised upward, further adding to the afterglow of what was an extraordinary 2020 — which saw the most new home sales since 2006. The factors that drove this rally — a limited supply of available existing homes for sale and a wave of young adults eager to enter the market — remain in place to begin 2021 and low mortgage rates should help fuel demand as well, even though they’ve jumped in recent weeks. This persistent demand and heightened competition should also drive more home construction projects in the months to come. Despite challenges, including rising costs of lumber, land and labor, confidence among home builders remains near an all-time high, and builders are finding flexible ways to overcome obstacles. This flexibility includes waiting to begin building a home until a sale is secured and/or favorable supplier and contractor agreements can be worked out — in January, the share of homes sold before beginning construction was 30.8%, up notably from both December and January 2020.”
Manufacturing: “American industry expanded for the fourth consecutive month in January but has yet to recover fully to the level of activity that preceded the pandemic. U.S. industrial production, which includes output factories, mines and utilities, rose 0.9% last month, the Federal Reserve reported. That followed increases of 1.3% in December, 0.9% in November and 1.1% in October. While the January activity was greater than most economists had projected, it was 1.8% below production in January 2020, reflecting lingering economic damage from the coronavirus pandemic.
Manufacturing rose 1% even though production of autos and auto parts (down 0.7%) was constrained by a shortage of semiconductors used in vehicles. Mining jumped 2.3% on a burst of oil and gas drilling, up for five straight months and 11.3% in January alone. Still, drilling is down 50.5% over the past year. An unusually warm January caused utility output to fall 1.2% in January; natural gas production slid 5.7%. But the utility drop “looks set to more than reverse in February’’ after blasts of snow and frigid temperatures across much of the country, Andrew Hunter, senior economist at Capital Economics, wrote in a research note.” As reported on February 17 by the Associated Press.
Exports, Imports and the International Trade Deficit: Released on February 26 by the Census Bureau, data for the month of January shows “The international trade deficit was $83.7 billion in January, up $0.5 billion from $83.2 billion in December. Exports of goods for January were $135.2 billion, $1.9 billion more than December exports. Imports of goods for January were $218.9 billion, $2.5 billion more than December imports. As for the trade deficit, the Bureau stated in early February: “The nation's international trade deficit in goods and services decreased to $66.6 billion in December from $69.0 billion in November (revised), as exports increased more than imports.”
Consumer Prices: Reporting on February 24 from data provided by the National Retail Federation, CNBC published the following information: “Retail sales are expected to grow this year between 6.5% and 8.2%, amounting to more than $4.33 trillion in sales, as the U.S. economy begins to reopen and more and more individuals receive the Covid vaccine, the National Retail Federation said Wednesday. A preliminary reading shows that retail sales grew 6.7% to $4.06 trillion last year, the industry’s leading trade group said, despite the health and economic challenges sparked by the pandemic. That was largely boosted by nearly 22% growth online. Over the course of the year, more Americans have turned to websites and apps to buy groceries, comfortable clothing and home goods. The numbers exclude automobile dealers, gasoline stations and restaurants. This year, NRF is forecasting e-commerce sales will grow between 18% and 23%, to between $1.14 trillion and $1.19 trillion in sales. This growth is included in NRF’s total retail sales projection. The trade group further expects that as Americans become more comfortable traveling again and attending social gatherings, more money will be spent on services, which normally account for 70% of consumer spending. “We are very optimistic that healthy consumer fundamentals, pent-up demand and widespread distribution of the vaccine will generate increased economic growth, retail sales and consumer spending,” NRF President and CEO Matthew Shay said.”
Producer Price Index: A leading economic indicator that tracks the prices paid by producers for goods and services and is monitored by the Bureau of Labor Statistics indicated that prices were increasing in January. “The Producer Price Index for final demand increased 1.3 percent in January, as prices for final demand services rose 1.3 percent, and the index for final demand goods advanced 1.4 percent. The final demand index moved up 1.7 percent for the 12 months ended January 2021.”
Consumer Price Index: A similar leading economic indicator that tracks consumer prices and is also monitored by the Bureau of Labor Statistics, reported an increase in prices, too. “In January, the Consumer Price Index for All Urban Consumers rose 0.3 percent on a seasonally adjusted basis; rising 1.4 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy was unchanged in January; up 1.4 percent over the year.”
Consumer Sentiment: “The Conference Board Consumer Confidence Index® improved again in February, after increasing in January. The Index now stands at 91.3 (1985=100), up from 88.9 in January. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—climbed from 85.5 to 92.0. However, the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell marginally, from 91.2 last month to 90.8 in February.
“After three months of consecutive declines in the Present Situation Index, consumers’ assessment of current conditions improved in February,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “This course reversal suggests economic growth has not slowed further. While the Expectations Index fell marginally in February, consumers remain cautiously optimistic, on the whole, about the outlook for the coming months. Notably, vacation intentions—particularly, plans to travel outside the U.S. and via air—saw an uptick this month, and are poised to improve further as vaccination efforts expand.”
Consumers’ assessment of current conditions improved in February. The percentage of consumers claiming business conditions are “good” increased from 15.8 percent to 16.5 percent, while the proportion claiming business conditions are “bad” fell from 42.4 percent to 39.9 percent. Consumers’ assessment of the labor market also improved. The percentage of consumers saying jobs are “plentiful” increased from 20.0 percent to 21.9 percent, while those claiming jobs are “hard to get” declined from 22.5 percent to 21.2 percent. Regarding short-term income prospects, 15.2 percent of consumers expect their incomes to increase in the next six months, down slightly from 15.8 percent in January. Conversely, 13.2 percent expect their incomes to decrease, down from 15.5 percent last month.” Source: February 2021 Consumer Confidence Survey®.
Interesting News: An article in the February 27 edition of The Economist discusses the changing landscape of giant technology-based companies. Just recently Apple and Facebook were in the headlines because the next iPhone upgrade for Apple requires explicit permission that would restrict user data access for Facebook, thus compromising Facebook’s operations. “Big tech firms are diversifying as their core products mature, new technological opportunities emerge, and regulatory threats mount in America, Europe and China. Microsoft and Alphabet are taking on Amazon in the cloud. Amazon is, in turn, the rising force in digital advertising. … Disney has acquired 116 million new streaming customers in 18 months while Walmart booked $38 billion in online sales last year. Independent tech firms such as Shopify in e-commerce and PayPal have broken through thanks to the digital surge caused by the pandemic, and are generating enough products to be self-sustaining.” These new rivalries may be very positive for consumers.
The end of February marks the end of the first full year of COVID-19 in the USA, which began to affect our population in mid-March, 2020. The United States is now engaged in vaccinating as many Americans as possible with the hope that the general population’s immunity will happen sometime between this summer and Christmas. President Biden’s primary focus is twofold: putting an end to the pandemic and restarting the economy. We join every American wishing him early and complete success.
Information contained herein is based on data obtained from sources believed to be reliable, however, such information has not been verified by Carlton Financial Group, LLC d/b/a Carlton Wealth or Synergy Financial Management, LLC. The information provided has been prepared and distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy or an offer of advisory services.
Sep 27, 2021by Joe Maas, CFA, CFP®, CLU®, ChFC, MSFS, CCIM™, CVA, ABAR, CM&AA
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