The BEA's third estimate of 4Q13 GDP was revised up to 2.6% growth. Early data for 2014, such as industrial production, housing starts and manufacturing surveys for February have prompted some downward revisions to estimates for 1Q14 GDP growth, but the extent to which severe weather has contributed to recent weakness remains to be seen. However, the data seems to be thawing in March, with retail sales increasing by 1.1%, housing starts increasing to a 946K annual pace, and indusrial production expanding by 0.7%.
The Bureau of Labor Statistics released the March employment report, which showed job growth of 192,000 and an unemployment rate of 6.7%. Initial claims increased to 304,000, however, the recent low figures point to continued strengthening in the labor market.
With the 1Q14 earnings season kicking off, the S&P 500 operating earnings are estimated to be $26.71, representing 3.6% year-over-year growth. While earnings growth is notably slower than previous quarters, it is important to remember 2013 was a record breaking year with all four quarters hitting consecutive historic highs in EPS.
Consumer prices increased 0.2% in March (up 1.5% year-over-year), on increasing core prices. Core prices firmed slightly as well, rising 0.2% (up 1.7% year-over-year). Final demand producer prices increased 0.5% in March on service increases (0.7%). Import prices increased 0.6% in March, reflecting higher imported fuel, fruit and coffee prices. Overall, the inflation environment remains benign.
The FOMC left rates unchanged but continued with plans to slow the purchase of longer-dated U.S. Treasuries and mortgage-backed securities another $10bn, from $35bn and $30bn per month to $30bn and $25bn starting in April. Additionally, while the statement and Janet Yellen's press conference reinforced the Fed's dovish stance, the summary of economic projections pointed to increased fed funds rate estimates by the FOMC, inferring the Fed may accelerate forward guidance sooner than markets expect. The minutes, however, downplayed these interest rate forecast increases.
Financial turmoil caused by ongoing European sovereign debt crisis.
Higher oil prices due to turmoil in the Middle East.
An over-easy Fed may pose a longer-term threat to bond investors.
Credit conditions for individuals and small businesses remain challenging.
Emerging market contagion could increase volatility in developed markets.
- While earnings growth has slowed, low average inflation and interest rates still make stocks look cheap in relative terms.
- Large-cap and growth stocks look cheapest.
- High-yield bonds look cheaper than Treasuries, but a diversified approach to fixed income investing seems appropriate given economic uncertainty.
- Residential real estate continues to look attractive as a long-term investment.