By Joseph Hogue, CFA
The markets took another hit last week, as data out of the U.S. and China both disappointed. The week started negative after U.S. employment data for March came in well-below expectations. This was followed by Thursday's increase in the number of people filing for unemployment benefits. Though the recovery in jobs appears intact, the upside surprises over the winter months suggest that April's report could be at the lower end of expectations as well.
China reported a duo of disappointing numbers last week. Though first quarter GDP growth overshadowed with only 8.1% growth, the trade data on Thursday showed imports were not increasing nearly at the rate expected. This may mean that Chinese growth, while continuing to support domestic companies, may not be the driver of global profits as once hoped.
The market also saw fairly weak global trade data out of Canada, Germany, and the United Kingdom last week. As exports weaken to large markets like Europe and China, the risk is high to protectionist intervention to protect domestic companies.
Is the U.S. recovery in jeopardy?
Along with disappointing employment data, the NFIB Small Business Optimism index showed the first decline in seven months for March. Both earnings trends and hiring plans were less optimistic as core inflation data came in at a gain of 2.3% on an annualized basis.
Three reports this week will bring important clues as to the resiliency of the recovery. The retail sales report on Monday is expected to be weaker in March, increasing only 0.4% against February's spike of 1.1% on a month-over-month basis. Auto sales came down significantly last month and imported consumer goods slipped 6.3% signaling an end to the strong spending seen at the beginning of the year. Despite the uptick in employment, real wage growth has been sluggish - which may factor-in on retail sales over the coming months.
Shares of higher-end department stores like Macy's (M) may do well in spite of sluggish retail sales, as the economic picture for the upper-middle class and above is decidedly better. These consumers are more likely to enjoy some wealth-effect from higher stock markets and will have more consistency in purchasing.
February's flat industrial production report should set us up for a positive number on Tuesday though the market is only expecting a 0.3% gain. Utility output continues to be weak due to warm weather, while business spending is a little stronger. Auto production may have come off somewhat though from very strong data over the last few months.
Investors will be closely watching this week's initial jobless claims on Thursday. Last week's report jumped by 13,000 to 308,000 breaking a long run of claims around 350,000 each week. Though any number under 400,000 signals overall job growth, a disappointment this week could have markets booking profits before the month's non-farm payroll report.
Shares of Monster Worldwide (MWW) fell more than 5.4% last week and are still well off their highs of last year on fear of a weakening jobs market. Despite increased competition from other online sites, Monster has good brand identity and should be able to do well over the next year. The non-farm payroll report in May could come in weaker than expected so investors may want to leg into a position in two purchases.
Will China continue to fuel global growth?
China's GDP report overshadowed some fairly positive reports on Friday. Both industrial production and retail sales showed impressive growth for the month. Thursday's report of new bank lending showed that the series of cuts to the reserve requirement may have helped to fuel more than $160.1 billion of loans in March, a report well-above expectations.
While some companies like Best Buy (BBY) and Home Depot (HD) struggle, General Motors (GM) is reporting record sales in China. The automaker reported an 11% jump in sales in March over the last twelve months. The company reported strong demand for new products and enthusiasm from first-time buyers.
The country returned to a trade surplus as imports increased a great deal less than expected. This spooked the markets and implied that China may not fuel export growth in other markets as expected. March inflation data showed pricing pressures increased faster than expected to 3.6% on an annualized basis but still below pressures seen last year.
While interest rates have not been reduced since 2008, many analysts see at least two more cuts to the reserve requirement this year. Though first quarter GDP growth is above the government's target for the year of 7.5%, the weakest year-over-year growth since 2009 may move the central bank to further stimulus measures.
Though fixed investment still accounts for almost half of the country's GDP, the government has an incredible amount of ammunition to manage a soft landing. The reserve requirement for banks remains around 20% and interest rates have yet to be cut. The government doubled the band in which the yuan could trade to one percent over the weekend. While investors may debate the outcome of China's growth story over the coming years, recent data and the incentive for a smooth transition in power put the odds firmly in favor of a strong economic rebound this year.