In the markets:
There was broad strength in U.S. equities last week as every major equity index ended green on the
week and reached their highest levels in several months. The Dow Jones Industrial Average rose +320
points, ending the week at 17,897 (+1.82%). The S&P 500 LargeCap index gained +1.62%, the MidCap
S&P 400 added +2.6%, and the SmallCap Russell 2000 index was up +3.06%. Transports and Utilities
were also both positive with Transports up +3.1% on renewed strength in energy, and defensive Utilities
even managed a positive close, up +0.36%.
In international markets, Canada’s Toronto Stock Exchange rose +1.79% along with almost all other
major international markets. Strength was definitely in Asia as Japan’s Nikkei rose a hefty +6.49%, Hong
Kong’s Hang Seng gained +4.6%, and China’s Shanghai Stock Exchange added +3.1%. In Europe, the
United Kingdom was up +2.25%. Germany and France both rose a very strong and identical +4.46%.
In commodities, silver was the big winner up 6.2% to $16.31 an ounce. That was an unusual divergence
from Gold which actually was in the red for the week, down -$5.50 an ounce to $1234.60. Oil continued
its strong rebound gaining +5.1% for the week to $41.71 a barrel for West Texas Intermediate crude oil.
The industrial metal copper also had a strong week, up +3.2%.
In U.S. economic news, jobless claims this week were the lowest since 1973 as initial claims fell 13,000
last week to 253,000, according to the Labor Department. Jobless claims have now remained below
300,000 for more than a year, indicating solid hiring.
Financial markets have staged a remarkable recovery from the worst start to a year in decades, but the
recovery isn’t flowing through to worker paychecks. Over the past 10 weeks the Treasury Department
reported that federal income and employment taxes withheld from paychecks are up only +2.7% from a
year ago—only half the growth rate of this time last year. The weak tax revenue report doesn’t quite
mesh with the 2.8 million (or 2%) gain in payroll jobs over the past year and +2.3% average wage
increase reported from other sources. Those numbers should add up to an annual gain of over +4% in
withheld taxes, so the +2.7% number is surprisingly puny. Unlike payroll data, tax withholding data are
not subject to later revision and are absolute numbers—not based on sampled data.
Optimism among small-business owners fell -0.3 point in March to a 2-year low of 92.6. Over the past
15 months there’s been a -7.7 point decline in the index. The size of the decline is flashing a warning
signal of a possible recession, according to the National Federation of Independent Business. NFIB’s
chief economist William Dunkelberg stated that April’s Index of Small Business Optimism will carry
special significance because it may determine whether a recession alarm should be rung or not. The
NFIB’s overall index hit a post-recession peak of 100.3 in December 2014, but it has remained below 100
since then.
The Consumer Price Index (CPI) rose +0.1% last month, with prices ex-food and energy also up +0.1%.
Economists had expected a +0.2% rise in both consumer prices and core CPI. Year-over-year consumer
prices are up +0.9%. Core inflation was 2.2%, down -0.1% from February mitigating concerns that
inflation is ramping up on services costs. The Fed has set a 2% inflation target, but Fed watchers note
that the policymakers’ favorite gauge is the PCE deflator and core PCE (Personal Consumption
Expenditures). That measure was 1.7% as of February, not quite as warm as CPI.
U.S. Retail sales for March disappointed, down -0.3%, while expectations had been for a +0.1% increase.
Removing the volatile autos and gas components, sales were up +0.1%, but this also lagged
expectations.
Industrial production fell sharply in March, according to the Federal Reserve, renewing concerns about
the nation’s manufacturing sector. Industrial output of the nation’s manufacturing, mining, and utilities
fell -0.6% last month, far worse than the -0.1% decline expected. On a regionally-positive note, the New
York Fed’s Empire State Manufacturing Index showed surprising strength rising to 9.56 this month from
0.62 in March. Economists weren’t expecting such a significant gain. The report showed broad
improvement with order growth the best since late 2014 and the employment subindex moving to
positive territory.
According to the Fed’s Beige Book, “most districts said that economic growth was in the modest to
moderate range and that contacts expected growth would remain in that range going forward.” It also
noted a general pickup in manufacturing activity, which had been negatively affected by a rising dollar.
Of the Fed’s 12 regional reserve banks, only Cleveland reported a decline in overall employment and
Cleveland and Kansas City were the only banks that reported a decline in manufacturing activity. The
report painted a generally improving picture of the U.S. economy two weeks ahead of the next meeting
of the Federal Open Market Committee, where officials gather to discuss their outlook and to set
benchmark interest rates. As of now, investors see essentially zero probability that the FOMC will lift
the federal funds target range this month, based on prices in fed funds futures contracts.
In international economic news, the International Monetary Fund (IMF) warned that a prolonged period
of slow growth has left the global economy more exposed to negative shocks and raised the risk that the
world will slide into stagnation. The IMF cut its world expansion forecast, as weak exports and slowing
investment dim economic prospects in the U.S., a consumption-tax hike undermines growth in Japan,
and a decline in the price of everything from oil to wheat continues to weigh on commodities producers.
The IMF expects the world economy to grow +3.2% this year, down from its earlier prediction of +3.4%
in January according to the quarterly update to its World Economic Outlook. The weaker outlook will
likely weigh on the central bankers and finance ministers who gather in Washington this week for spring
meetings of the IMF and World Bank.
In Canada, the Bank of Canada held its key interest rate steady and raised the economic outlook for
2016 as it sees new government stimulus outweighing economic headwinds. The Bank of Canada kept
its main interest rate at 0.5%, and stated that slowing foreign demand, downward revisions to business
investment, and a strengthening currency all weighed on the country’s future economic outlook.
In the United Kingdom, the Confederation of British Industry (CBI), the country’s most prominent
business lobbying organization, stated that an exit from the European Union would cause a serious
shock to the economy and could cost 100 billion pounds ($145 billion) in lost economic output and
950,000 jobs by 2020. Monday’s report by the CBI is the latest in a string of industry reports expressing
concerns over slipping investor confidence caused by Britain’s potential exit from the EU.
In Germany, Finance Minister Wolfgang Schauble struck back at international criticism of Berlin’s budget
policies, noting that Germany can’t save the global economy by spending more on social programs. “We
are not the cause of global economic problems,” he stated at a joint news conference with Bundesbank
President Jens Weidmann. The comments highlight Berlin’s growing isolation in international policy
circles as it seeks to rein in government spending and curb easy-money policies while central bankers
elsewhere are pursuing paths of fresh economic stimulus and domestic spending.
In Japan, Japanese officials were warned not to devalue the yen when Taro Aso, Japanese Finance
Minister, told his U.S. counterpart Jack Lew that he was very concerned about the surge that took the
yen above Y108 to the dollar earlier this week. The U.S. Treasury reported that both men had agreed to
honor their G20 exchange rate commitments limiting Japan’s options to deal with the stronger yen. The
stronger yen is raising the cost of Japanese products in international markets, which consequently has
an adverse effect on the nation’s economy.
China’s economy expanded +6.7% in the first quarter versus a year earlier, the government said. It was
the smallest year-over-year increase since the first quarter of 2009, but it also signaled that the world’s
second largest economy is stabilizing. Several other reports also indicated solid growth: March retail
sales rose +10.5% versus a year earlier, industrial production rose +6.8% versus a year earlier, and fixed
asset investment rose +10.7% in Q1 versus a year earlier.
Finally, it is no secret that the Apple iPhone has been a radical and revolutionary innovation in the tech
space. On January 9, 2007 the late Apple CEO Steve Jobs took the stage at the Moscone Center in San
Francisco and introduced the first iPhone. “Today, Apple is going to reinvent the phone,” Jobs
proclaimed.
However, the iPhone didn’t just reinvent the phone—it also reinvented the digital camera.
The latest iPhone camera snaps better images than almost all traditional mass-market digital cameras,
and is approaching the quality of many high-end SLR cameras. One consequence of the iPhones’
omnipresence is the multiyear plunge in digital camera sales as shown in the graphic below. The market
for so-called “point-and-shoot” cameras has been essentially wiped out, with sales falling for 29
consecutive months.
The high-end SLR market has held up much better, but it is a comparatively tiny market. Industry
analyst Wee Teck Loo says, in a bit of understatement, "Canon has launched its EOS 7D Mark II, a highperformance SLR able to meet the needs of professional photographers and while it has been very well
received, it is unlikely to prevent the market from further contracting."
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)