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Japan Situation Overshadows Mixed Signals in U.S. schieffer

By: Mark Schieffer, CFA
EVP Chief Investment Officer

At the moment, the markets are being dominated by the nuclear situation in Japan, which was caused by a massive earthquake and resulting tsunami and aftershocks. Treasury yields have moved lower on a flight-to-safety move and on prospects that global growth will move lower over the next 3-6 months as the problem in Japan may mean the third largest global economy is taken off-line. In the short run, we are seeing a respite in oil prices and other commodities. Overall, we should see slightly slower growth and inflation in the near term.

The Federal Open Market Committee (FOMC) maintained their position of keeping rates “exceptionally low” for an extended period and remains committed to their quantitative easing program through the end of June. They did upgrade the U.S. domestic growth forecast, but didn’t comment on Japan as it is too soon to see the potential impact. The Fed is becoming more sensitive to the regressive effects of rising food and energy prices. While overall inflation remains very low, they are concerned about consumer inflation expectations with headline food price increases at the highest levels since 1974. Unfortunately, the big cut in the payroll tax is being completely absorbed by increases in food and gas prices.

Optimism among small business owners is improving--the National Federation of Independent Business has reported an increase in their optimism index for six out of the last seven months.  This is extremely encouraging as small businesses traditionally lead the U.S. economy out of recession with new hiring. Retail sales rose an impressive 1% in February after the bad weather in January subsided. A good chunk of the increase is due to a rise in gasoline prices, but sales rose a healthy .6% excluding that factor. Auto sales now top a 13 million annualized unit pace, the highest since August 2008. The U.S. manufacturing sector continues to expand and may benefit in some ways from the disaster in Japan. The labor market is also showing some strength, with private sector jobs increasing by 222 thousand in February and the unemployment rate moving below 9% for the first time since April 2009.

Housing continues to bump along the bottom as foreclosure inventory still needs to be reduced. A side benefit of the recent bond market rally is another dip in mortgage rates, now well below 5%.

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