Payrolls at US companies posted another respectable gain in February, advancing 212,000 over the previous month, according to this morning’s update of the ADP Employment Report. The increase is a bit soft relative to the consensus forecast, but the gain still reflects a healthy bias for expansion. Reviewing the numbers in context with recent history, however, shows that the pace of growth is slowing in the private sector. Is that a sign that the US economy’s acceleration of late is fading? Maybe, maybe not—another couple of months will bring deeper clarity. Meantime, there’s a bit more anxiety about the potential risk that the macro trend is slipping back into a familiar pattern in the wake of the Great Recession: sluggish growth.
A recent paper (“Evaluating Trading Strategies”) on the hazards of backtesting in The Journal of Portfolio Management has been receiving a fair amount of attention lately, inspiring some folks to go off the deep end and argue that econometric analysis of investment strategies is always a bad idea. That’s a bit much for the simple reason that the only alternative to backtesting is blindly throwing money at markets without the benefit of perspective. Yes, backtesting can be dangerous when designed without best practices in mind. But in the grand scheme of investing, we’re all relying on one form of backtesting or another.
● Eurozone Retail Sales Surge In January | WSJ
● Eurozone Composite PMI: economic growth at 7-month high | Markit
● Harsh Winter Weather Bit Into US Auto Sales in February | NY Times
● Germany Services PMI: Sharpest rise for 5 months in Feb | Markit
● UK Services PMI: Strong growth of service sector sustained | Markit
● US firms in China expect less rosy times as economy slows | Reuters
● India surprises with second interest rate cut | BBC
Private nonfarm payrolls in the US are projected to increase by 213,000 (seasonally adjusted) in tomorrow’s February update of the ADP Employment Report, based on The Capital Spectator’s median point forecast for several econometric estimates. The median projection matches January’s increase.
The expected risk premium for the Global Market Index (GMI) increased in the February estimate — the first rise in six months. GMI — an unmanaged, market-value weighted mix of the major asset classes — is projected to earn an annualized 4.0% over the “risk-free” rate for the long term. (For details on the equilibrium-based methodology that’s used to generate the forecasts each month, see the summary below). Today’s updated estimate, which is based on data through the close of last month, jumped 50 basis points from the previous 3.5% projection.
● Weak US consumer spending points to slower first-quarter growth | Reuters
● German retail sales surge at fastest pace in seven years | Reuters
● U.S. Manufacturing Growth Is Slowest In 13 Months | RTT
● US construction spending falls 1.1 percent in January | Fox
● Steady growth of global manufacturing continues in February | Markit
February witnessed a bit of mean reversion among the major asset classes as the winners and losers at the extremes in recent history traded places last month. The bearish trend in commodities (Bloomberg Commodity Index) eased as the asset class generated its first monthly gain since June 2014. Meanwhile, the high-flying real estate sector (real estate investment trusts) stumbled in February, marking the first case of red ink in five months. As a result, REITs (MSCI REIT Index) were dead last in February’s horse race, retreating by 3.6% on a total return basis. As for the top performer, the award goes to foreign equities in developed markets. The MSCI EAFE rallied sharply last month, advancing 6.0% in US dollar terms (unhedged). US equities were in close pursuit, climbing 5.8% via the Russell 3000 Index.
● Dollar near 11-year high after Chinese rate cut, eyes on ECB | Reuters
● China’s factory output rise for 1st time in 4 months | Markit
● Eurozone Consumer Prices Fall Less Than Expected In February | RTT
● Eurozone jobless rate ticks down to 11.2% in January | Eurostat
● Eurozone manufacturing maintains modest growth in February | Markit
● Germany Manufacturing PMI signals modest improvement | Markit
● UK Factory Activity At 7-month High, Exceeds Forecast | RTT
Economists are projecting no change to a slight decline for tomorrow’s January update on personal consumption expenditures (PCE) vs. December. The consensus forecast via Econoday.com, for instance, is zero; Briefing.com’s survey of analysts expects a marginal loss. It all adds up to a good guess, based on last month’s release on retail sales, which slumped 0.8% in January. The positive spin is that headline spending is weak because of “falling gasoline sales in dollar terms,” as I discussed a few weeks ago, which is to say that the trend still looks encouraging after excluding spending at the pump—particularly on a year-over-year basis. That’s still my working assumption, in part because payrolls continue to rise at a robust pace. The main event for Monday will be deciding if the PCE data offers a different perspective.
The ISM Manufacturing Index is expected to decline to 52.8 in tomorrow’s update (Mar. 2) for February vs. the previous month, based on The Capital Spectator’s median point forecast for several econometric estimates. The prediction is still above the neutral 50.0 mark and so the current outlook remains in moderate growth territory for this benchmark of economic activity in the US manufacturing sector.