MarketView for March 3

 

 

Summary

 

The major equity indexes fell sharply on Monday alongside other risky assets globally as tensions in Ukraine and Russia escalated after Russian President Vladimir Putin declared he had the right to invade his neighbor.

 

News that Ukraine mobilized for war on Sunday and Washington threatened to isolate Russia economically overshadowed better-than-expected economic data, including an index showing that factory activity rebounded from an eight-month low in February.

 

The S&P 500 had closed at a record high on Friday, and profit-taking was expected on Wall Street due to the political uncertainty. The index found some support when it fell to 1,840, but broke below it after the first attempt. The S&P 500 extended losses in early afternoon trading and then recovered slightly to close above the support level.

 

As a result of all the nervousness, the CBOE Volatility Index chalked up a rise of 14.29 percent, its largest one-day rise in a month, to end at 16. The VIX, which generally moves inversely to the S&P 500, is often a hedge against the market's further decline. The VIX is also regarded as Wall Street's barometer of fear.

 

Russian stocks and bonds fell sharply and the central bank raised interest rates to defend the ruble. The MICEX index of Moscow stocks tumbled 10.8 percent and the dollar-denominated RTS .IRTS stock index dropped 12 percent. More importantly, the market rout highlighted the damage the crisis could do to Russia's vulnerable economy, making it harder to balance the budget and potentially undermining business and public support for Putin.

 

Brent crude prices were up $2.13 to settle at $111.20 per barrel while domestic crude prices gained $2.33 to end at $104.92 a barrel. Energy stocks could lose if relations between the United States and Russia deteriorate further.

 

Gold prices hit a four-month high as investors sought safe-haven assets.

 

Although the focus was on Ukraine, the economic calendar was busy on Monday. U.S. factory activity rebounded from an eight-month low in February, according to the Institute for Supply Management, while the Commerce Department said consumer spending was up more than expected in January. The data suggested that the economy was regaining some strength after a recent slowdown.

 

Approximately 6.95 billion shares changed hands on the major equity exchanges, slightly lower than the 7 billion average numbers of shares traded for the past month, according to data from BATS Global Markets.

 

Economic Data Encouraging

 

Factory activity rebounded from an eight-month low last month and consumer spending increased more than expected in January, suggesting the economy was regaining some strength after abruptly slowing in recent months.

 

The signs of a comeback, also evident in a brisk rise in automobile sales and a surprise gain in construction spending, should bolster the Federal Reserve's resolve to keep scaling back its massive monetary stimulus.

 

The Institute for Supply Management reported that its index of national factory activity rose to 53.2 last month after slumping in January to 51.3, which was the weakest reading since May. A reading above 50 indicates expansion.

 

New orders bounced back as did supplier deliveries, inventories and order backlogs. However, production slipped for a third straight month and contracted for the first time since August 2012.

 

Manufacturers said cold weather was still having an impact on operations, by hampering logistics, causing back-ups at ports and disrupting supplies of raw materials. Frigid temperatures across large parts of the country have been blamed for weighing on growth at the start of the year.

 

In a separate report, the Commerce Department indicated that consumer spending increased 0.4 percent in January after a 0.1 percent gain in December. Economists had expected consumer spending, which accounts for more than two-thirds of U.S. economic activity, to rise only 0.1 percent.

 

The increase in spending was driven by a 0.9 percent jump in outlays for services, the biggest gain since October 2001. The rise likely reflected a surge in demand for utilities amid the cold weather, as well as increased spending on healthcare after President Obama's signature 2010 healthcare law went into effect.

 

Weak economic data had led to speculation that the Fed might pause in its efforts to wind down the amount of money it is pumping into the economy through monthly bond purchases. However, Monday's data and forecasts for some improvement in employment in February made such a move unlikely at this time.

 

The spending data led Barclays to raise its forecast for first-quarter economic growth by two-tenths of a percentage point to a 2 percent annual rate. Macroeconomic Advisers lifted its estimate by the same margin to a 1.6 percent pace.

 

Data ranging from housing to industrial production and hiring have suggested the economy softened early in the first quarter after expanding at a modest 2.4 percent rate in the final three months of last year.

 

Apart from the impact of the cold weather, businesses have been placing fewer orders with manufacturers as they work through stocks of unsold goods. The end of long-term programs such as unemployment benefits and a reduction in the food stamp program, have reduced economic growth.

 

While spending on services accelerated in January, spending on goods fell for a second straight month. However, a rise in auto sales last month suggested outlays on goods have picked up. Auto sales were better than expected as hefty incentives lured customers into dealerships late in the month despite the weather.

 

In January, income rose 0.3 percent in January, boosted by government transfers for healthcare payments and a cost of living adjustment for Social Security recipients. That offset the drag from the expiration of jobless benefits for more than one million long-term unemployed people at the end of December.

 

The report showed a lack of inflation pressures. A price index for consumer spending rose 0.1 percent after increasing 0.2 percent in December. Over the past 12 months, prices rose 1.2 percent, compared to an advance of 1.1 percent in December.

 

Excluding food and energy, prices edged up 0.1 for a seventh straight month. These core prices were up just 1.1 percent from a year ago, after rising 1.2 percent in December. Both measures remain well below the Fed's 2 percent target.

 

Construction Spending Rises Unexpectedly

 

The Commerce Department reported that construction spending was unexpectedly higher in January, up 0.1 percent to an annual rate of $943.1 billion as an increase in private construction projects offset a drop in public outlays in a hopeful sign for growth this quarter. December's construction spending growth was revised up to 1.5 percent.

 

Consumer Spending Higher

 

The Commerce Department reported Monday morning that consumer spending increased 0.4 percent after advancing by a revised 0.1 percent in December. Spending was previously reported to have gained 0.4 percent in December. January’s outlays on services recorded their largest increase since late 2001. The increase was driven to a great extent by a 0.9 percent rise in services, the largest gain since October 2001. That likely reflected an increase in demand for utilities as Americans tried to keep warm during an unusually cold spell.

 

With households spending more on utilities, outlays on goods fell 0.6 percent in January.

 

Despite the services-driven rise in spending, inflation pressures remained muted.

 

A price index for consumer spending rose 0.1 percent after increasing 0.2 percent in December. Over the past 12 months, prices rose 1.2 percent, compared to an advance of 1.1 percent in December.

 

Excluding food and energy, the price index for consumer spending edged up 0.1 percent, rising by the same margin for a seventh straight month. Core prices were up 1.1 percent from a year ago, after rising 1.2 percent in December.

 

Both inflation measures remain stuck below the Federal Reserve's 2 percent target.

 

When adjusted for inflation, consumer spending rose 0.3 percent after falling 0.1 percent in December. The rise in so-called real spending could boost first-quarter gross domestic product.

 

Income rose 0.3 percent in January after being flat the prior month. The expiration of jobless benefits for more than one million long-term unemployed people at the end of December had curbed income growth.

 

Income at the disposal of households after adjusting for inflation rose 0.3 percent in January after falling 0.2 percent the previous month.

 

With spending a touch above income growth, the saving rate, the percentage of disposable income households are socking away was unchanged at 4.3 percent in January. However, actual saving fell to its lowest level since March.