The slowdown continues, though the data continues to be mixed (and if you're having a slowdown, that's a good thing). Yet the market continues to hang on in impressive fashion. A Friday rally was able to shake off a disappointing report on first-quarter GDP that we said last week rated to be shy of consensus.
It was a low-volume affair that involved some calendar-based trading. A second disappointing report on Monday, this time on spending, sent equities to another lower open, as did the disappointing ADP report on Wednesday. Yet a bid has persisted in the market, with equities consistently battling back, including a closing-minute flurry on Monday that managed to lift the Dow into the black for April.
The low-volume support has the feeling of a contrived blip. It shouldn't have been about Amazon (NASDAQ:AMZN), lucky enough to report after Apple's (NASDAQ:AAPL) spectacular price rebound and reap some of the ensuing madness. A great deal of nonsense and outright fiction was repeated about a company whose quarterly income fell over 40% from the previous year, managed fresh lows in operating margins of 1.5%, and guided to a quarterly range whose midpoint is an expected loss. But it beat estimates. Pretty good stuff for a company growing operating cash at 1% a year. At this rate they could be paying a dividend within fifty years.
But when sales growth is as hard to come by as it is these days, good judgment can give way to desperation. Barron's proposed reviving the Dow Jones index with Apple and Google (NASDAQ:GOOG). Maybe instead of a Nifty Fifty, we could have a Fab Five?
The fixed-income market saw things differently. Treasuries rose for the sixth straight week, in effect betting on the opposite direction, in its longest run-up since June 2011. It isn't really comforting to know that the latter coincided with the first leg of last year's big equity swoon.
In any case, central bank action remains the swing factor. Neither the Fed nor the ECB are keen on doing more quantitative easing, in large part because they would like to see elected government take on more of the heavy lifting for rebuilding the economy, yet also due to concerns about putting an unhealthy amount of money into the system. Where exactly the border to too-much land lies is a matter of much opinion and no little controversy - you could start a bar fight about it inside the Beltway - yet none of us really knows.
One thing the central banks can be certain of, though, is that none of them want to be faced with trying to get the toothpaste back into the tube afterwards. That leaves them trying to steer between not abandoning the economy, yet not getting cornered into being the permanent fallback position either, leaving politicians free to bicker and avoid unpopular choices.
In the meantime, the equity markets' dependence on the heroin of liquidity to pull them out of every funk has led to an ongoing game of central-bank chicken and manic-depressive behavior in prices. Many are hopeful that ECB chair Mario Draghi will make reassuring noises in his press conference Thursday morning. What happens next with the Fed will depend in large measure on what happens in the next couple of jobs reports.
Suppose that Friday, for example, were to see a print above 200,000. Equities would rally, but it would also leave the Fed on hold. If, on the other hand, a stinker arrives with a gain below 100,000, equities sell off and Bernanke has to worry again. A disaster of a report, say something below 20,000, could provoke a stock market rally (at least in the U.S.) on the presumption that Fed action (QE-3) is now inevitable. In between is a great middle, where a number that is near consensus (currently 165,000) may well leave everyone in a muddle - and free to obsess over such matters as European elections and the next jobs report. The central bankers will be fretting right alongside the rest of us.
Ford (NYSE:F) reported earnings last Friday, with the gist of it being that North American operations are running great, but European ones lost a lot of money and Asia a little (partly due to expansion costs). Yet European equity markets rose because US equities did. That makes us uncomfortable, because we've certainly seen a lot of European revenue weakness in recent earnings reports and the latest batch of data this week wasn't positive. In 2006-2007, US markets rose in the face of a slowdown because global growth would bail us out of our problems. It didn't. Now overseas markets are rallying because the US alone is going to bail out the globe?
You wouldn't guess it from the GDP print. 2.2% was well short of the 2.5% consensus and far from the many three-plus estimates that were floating across the tape that morning. Despite the talk about consumer spending being stronger, with real PCE up 2.9%, keep in mind that real final sales were at a 1.6% annual rate, and that real gross domestic purchases fell to 2.1% from 3.1% in the fourth quarter.
A couple of anomalies stood out to us. One is that nominal GDP ran at the same rate (3.8%) in the first quarter as it did in the first. Another is that the price deflator was too low for the second quarter in a row. In the fourth quarter, the price deflator used was 0.8% (annualized), which we think was too low. We'll cut the BEA (high priests of the GDP calculus) a little slack on the grounds that a one-off dip in energy prices threw the data off in the quarter, even as core rates continued to rise.
But consider that the consumer price index rose at a 3.7% annual rate in the first quarter, the producer index rose at a 2% rate, and the BEA's own estimate of the price index for gross domestic purchases was 2.4% (2.2% excluding food and energy). Yet standing alone next to all of these numbers is an inexplicably low 1.5% deflator (rate of price appreciation) for real GDP. We have to wonder what's going on.
You can thank the auto sector for the spending strength - it was responsible for half of the GDP number on its own. Motor vehicle sales got off to a flying start, though the rate weakened a bit in March and April. The warmest first quarter since 1895 surely pulled some spending forward.
However, in support of the notion that the economy is not, in fact, running at a better rate than 2.2%, was some data from Federal Reserve branches: the Chicago Fed's National Activity Index fell sharply to a minus 0.29 reading (from plus 0.07), and the Philadelphia Fed's index of leading indicators eased to a 1.7% annual rate from 1.8%.
A good chunk of the softness in those two numbers can be traced to the weakness in March factory orders and durable goods. The weakness is going to show up in GDP when shipments start to ease. Yet there was a piece of good news in the factory orders report, which revises some of the durable goods data, in that the drop in business investment was revised from (-0.8%) to a much smaller (-0.1%).
The ISM manufacturing report seemed to belie some of the weakness. It was puzzling in some ways because the increase to 54.8 was at odds with a batch of recent regional reports, particularly Chicago. The components were satisfactory too, with new orders increasing to 58.2 and the number of sectors reporting growth a robust 16 out of 18. There were a couple of cautionary comments, but it was a sound report.
That said, we are running at a slower rate of growth in the first months of 2012. The recent figures for the ISM continue to run about five points lower than the year-ago figures, including new orders data. All of the regional surveys are running lower too. While personal income rose more than expected in March, growth in real personal income in the first quarter was only 0.4% against 2.5% in Q1 2011, and real disposable income grew only 0.1% versus 0.3%. The spending data has been helped by car purchases, which are financed, but spending seems otherwise subdued.
Some strategists would say be quiet, and pass the easing bottle. There's a chance that in Europe, a victory for Francois Hollande in the French presidential election could perversely ignite an equity rally - on a Socialist victory, no less! - with traders betting on a new pro-growth approach (details to follow). Others are convinced that election-year historical patterns are too weighty for the market to pull back for long - and if the right number of strategic buyers believe in it during these trading market times, it could be self-fulfilling.
We ourselves are hoping for a milder deceleration than the summer of 2011, in part because there is no tsunami, and in part because business investment has already started to ease. But a little slowdown could go a long way as the weather warms, and the European periphery countries still feel like housing in 2007 - we can only rally for so long on the pretext that the blow-up we can all see coming hasn't happened yet.