Irony: What's Driving US Stocks? (Part 2 of 6)
With the notable exception of the labor market, we have most U.S. economic data running below expectations, to the point where an index of economic surprises (Bloomberg ECO U.S. Surprise Index) is now at its lowest level since 2009. Instead of selling, investors are taking solace in the fact that low inflation and the moderating economic growth may lead the Federal Reserve (or Fed) to increase interest rates at a slower, gentler pace. This sentiment led to a market rally the week before last, however negative economic data caught up with investors last week, and caused markets to relinquish gains.
Market Realist – Economic data is running below expectations.
The week before last, advances by US stocks (SPY)(IVV) came even with economic data running below expectations. The previous graph shows the Industrial Production Index. It increased by a marginal 0.1% in February.
What’s worrying is that manufacturing output declined for the third month in a row. Mining also registered a monthly decline of 2.5%. The decline can be attributed to a fall in coal mining and oil and gas well drilling (USO)(BNO). The energy sector’s output (XLE) has been adversely affected by the slide in oil prices caused by a global supply glut.
The Federal Reserve indicated that the 0.1% increase in overall industrial production was due to a 7.3% rise in utilities’ (XLU) output. Utilities were supported by the unusually cold winter. The previous graph shows the breakup of the Industrial Production Index by major industry groups.
The ISM Manufacturing PMI (purchasing managers’ index) declined from 53.5 in January to 52.9 in February. The new orders subindex fell from 52.9 to 52.5. Production fell 2.8% from 56.5 to 53.7. According to the ISM (Institute of Supply Management), the West Coast port strike adversely affected imports and exports. This led to a decline in PMI estimates. Although PMI estimates above 50 still indicate expansion, the manufacturing sector’s growth slowed over the last month.
Read on to the next part of the series to understand how the FOMC’s (Federal Open Market Committee) meeting affected investor sentiment in the last couple of weeks.
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