Markets pop but shadows linger

There was more soft economic news out of China this week that generally kept a lid on emerging-markets stocks, with indexes generally showing tiny decreases. Even though a wide variety of Chinese data looked soft this week, investors keyed in on the first-quarter GDP report, which showed a 7.4% growth rate--still one of the two lowest rates of the past two years. However, everyone had been talking the number down, and expectations were for a 7.3% print. Therefore, emerging markets acted better later in the week as investors breathed a collective sigh of relief that things weren't worse. I am not so sure that the worst is behind the Chinese economy just yet. Next week's Markit purchasing managers' data will provide some further clues about April and beyond.

In U.S. economic news, retail sales looked stunningly good on the surface, though less good when analyzed on a year-over-year basis. Industrial production also managed to hold its own after a huge bounce in February and despite down auto production. Housing data managed to lay yet another egg, with builder sentiment, housing starts and housing permits falling below expectations. There were a few hopeful signs under some dreadful headline housing numbers. I still believe the long-term housing rebound is intact, but the days of really big increases are probably behind us.

Retail sales make a really nice pop

Month-to-month retail sales jumped an impressive 1.1% in March compared with estimates of a still-aggressive 0.9% consensus forecast. The trend was good, too, as February sales growth was lower at 0.7%. Even excluding autos, which everyone knew did well, monthly sales jumped 0.7% compared with estimates of 0.5%. I do caution that sales were virtually unchanged for three months in a row--November, December and January--so the economy was due to make up for some lost time.

I also warn that the year-over-year averaged data, excluding autos and gasoline, was much less exciting, as shown below. At least the year-over-year trend in retail sales growth managed its first improvement since last July. Given a late Easter/Passover holiday, much-improved weather and a weak period during April and May 2013, I suspect that the year-over-year growth rate in retail sales will inch up in the months ahead. However, payments for high winter fuel bills and a later-than-usual jump in spring gasoline prices will probably hold back the improvement by a little.

E-commerce continues to knock the cover off the ball

The sector data wasn't terribly enlightening this month given shifting weather trends. However, after a little weakness in the early winter, the nonstore retailers (mainly e-commerce retailers, including   Amazon  AMZN) reported stellar growth, showing month-to-month growth rates that are more typical of year-over-year growth in several other categories.

Indeed, Howard Schultz, chairman of   Starbucks  SBUX, may have been correct in predicting that e-commerce had reached the tipping point that could see its sales accelerate more quickly. Likewise, building materials showed some good numbers as stocking up on cold weather-related needs, an uptick in remodeling activity and repairs to winter property and garden damage all contributed to a very nice rebound.

On the negative side, electronics and appliances were off a bunch because of lower prices, a lack of new products and a slow housing market. Grocery sales slumped a bit over the past two months after several months when consumers felt compelled to stockpile household goods in fear of yet another storm.

Industrial production shows another monthly gain, year-over-year data forming bottom

Monthly manufacturing-oriented industrial production grew 0.5% in March, following growth of 1.4% in February, after dismal results in December and January. The March figure also beat consensus estimates. February's data was also revised sharply higher. So apparently it was those that counted workers and output, and not the workers themselves, who didn't make it to work in February.

It was hard to discern much from sector data that appears to be horribly distorted by weather effects. Furthermore, weather-related bounces seemed to come at different times for different industries. Some industries that witnessed large declines stretching over two or three months produced strong rebounds in March in many cases (textiles, apparel, wood products, furniture). Many auto-related categories had a poor March following a sharp rebound that came in February (primary and fabricated metals, autos and machinery). Computers was one of the very few categories that has been consistently strong over the past three months along with perhaps plastics (low relative natural gas prices).

The year-over-year data, like many other data points we discuss this week, is a little less exciting. At 2.4%, industrial production for manufacturing still remains below the 2.6% average since 1972. However, the rate is at least above the 2.2% gain registered in February (the originally reported number was even worse; February data was revised substantially upward).

Higher PMI scores might suggest that further improvement lies in the months ahead. A much easier April comparison could help, too, but there is potential for lower shipments to China.

The year-over-year data also pointed to a more balanced manufacturing economy. For the single month of March, manufacturing production was up about 3% and almost every category was in a range of 2% to 4% growth. That contrasts with parts of the recovery when autos and airliners were up almost double digits while many industries were mired in outright declines. This time only textiles and paper registered small declines, while the auto industry showed an outsize growth of 6%, which is nevertheless considerably lower than in reports from several years ago. The more balanced report is probably why the purchasing managers' reports have been making good progress even as industrial production overall slipped a bit. The relatively small number of powerhouse industries slowed (auto and airliners) while a large number of smaller companies and industries reported modestly better results, but not enough to offset the slower growth in aircraft and autos.

Housing data disappoints big time, but there is still hope

News on housing starts, permits and builder sentiment all managed to disappoint investors this week, calling into question the robustness of the current housing recovery.

It was already fairly well known that existing-home sales would be down in 2014 compared with 2013 (fewer foreclosures and distress sales), but new home sales were expected to see a very good year in 2014. In general, predictions were for housing starts to move from 927,000 units in 2013 to something in the range of 1.05 million-1.1 million units in 2014 or maybe even a tad better.

The numbers released this week were not particularly supportive of that forecast. Housing starts moved up modestly from 920,000 units (annualized, seasonally adjusted) in February to 946,000 units in March. Expectations were for March starts of 990,000 units, based on improving weather, pent-up demand and decent growth in housing permits the previous month. So, Wall Street was clearly not happy. The weather certainly played some role as March was still not a great month weather-wise to begin building a new home or apartment building. Higher prices, higher mortgage rates and low availability are having some impact on the data, too.

So far in 2014, housing starts have averaged 923,000 for the first three months of the year, compared with 957,000 units a year ago. With a quarter of the year behind us and averaging just 923,000 units, it will be difficult to achieve the high-end estimate of 1.1 million units. To get to that high-end estimate, starts would need to average close to 1.15 million units in the back three quarters of 2014, which seems aggressive given where the U.S. housing industry is today. With permits just under a million units for March, April may not be a breakout month for starts, either.

Turning to the March data and year-over-year growth rates, the data was not very promising, at least in terms of trends in the starts data. Slightly more encouraging is the fact that the year-over-year growth rate in permits, which usually leads starts, is improving.

In other promising news, the raw level of permits has been running well ahead of starts. Permits have run at a more impressive 986,000 annual rate for the first three months of 2014, while starts have been a more meager 923,000. That is an unusually large gap that almost by definition has to close, unless projects are abandoned after a permit was already obtained--not a likely prospect. Unfortunately, most of the overpermitting is in the multifamily area, with single-family starts and permits relatively closely aligned.

Homebuilders not feeling so hot, either

The Homebuilders Sentiment Index registered its third reading in a row below 50 for the month of April. March's reading was also revised downward slightly from 47 to 46. Readings below 50 indicate more builders saw declines than increases. The reading for April was 47, just 1 point above March's reading.

This is generally a pretty bullish group, so it is disappointing that this metric didn't improve more in April as the weather improved. However, our housing analyst noted that many of the respondents are small builders that are still finding it difficult to get credit. I would add that the smaller builders are less likely to be participating in the boom in multifamily housing.

Consumer prices edge a bit higher

The Consumer Price Index edged up 0.2% in March, which was modestly above expectations. The year-over-year averaged data remained in line with the prior two months at 1.4% growth (single month was 1.5%).

The somewhat higher prices came despite the fact that reported gasoline prices were down in March. Higher food prices and potentially a less helpful medical sector may mean that we have seen the best inflation data for 2014. However, I don't believe overall inflation will reach 2% for the year, either.

This should also soothe worries of impending deflation. It also could mean that the Fed will be less prone to stopping its bond purchase tapering program if inflation is on the rise. However, the higher inflation is not good news for workers who saw nominal wages dip in March, which will now be compounded by a higher-than-expected inflation rate. That and now-higher gasoline prices won't be good news for consumer spending in April.

While higher energy prices dominated the overall increase, there are a lot of relatively higher price increases in other categories. Groceries were up 0.5%, used cars 0.4% and apparel 0.3%. Lower gasoline prices (only because of a massive seasonal adjustment factor), lower drug prices and flat auto prices (all those incentives to move those cars off the lot) helped balance these and the energy sector increases.

More home data and world manufacturing data due next week

Nobody is expecting much news on the existing-home sales front, and the housing starts report this week is a better indicator of housing sector health than next week's new home data, so the Flash PMI data from countries around the world will take centre stage.

The report from China is always a market mover and may be even more so this month. Fears of slowing growth in China, the lower GDP growth rate for the first quarter announced this week, and lower export numbers for three months running mean investors will be closely watching the April manufacturing/purchasing managers data for any sign of improvement. Although I suppose the data release could be a win-win for investors. A poor number means more likely government intervention to stimulate growth, and a good number would indicate that earlier programs were beginning to work. A truly disastrous number, say under 47, would give the market a good scare. The Chinese PMI has fallen in a straight line from 50.9 in October to 48.1 in March. Investors will also be keeping an eye on the European indexes to see if a slower China and the Russia-Ukraine situation rattled any manufacturers.

Durable goods orders were up a decent 2.2% in February, but much of that was related to aircraft and transportation. Expectations are for orders to fall off in March to a still-healthy 1.5% monthly growth rate. The more important nondefense capital goods orders less aircraft was off 0.7% in February and up only 2.4%, and have been declining for five consecutive months. Hopefully, the March data will better this worrisome trend.

Economists aren't expecting much change in new home and existing-home sales data

This week's housing data was disappointing, causing the expectations for next week's data to fall off. It's now becoming widely accepted that existing-home sales will be down in 2014. That certainly looks to be true again in March. Based on poor pending home sales data, existing-home sales are expected to be down from an annualized rate of 4.6 million to 4.5 million units, which is down from last summer's high of 5.4 million units. Everyone's expectations for sales are low, and another bad number would surprise no one. However, maybe everyone has gotten just a little too negative. With housing starts going nowhere, more people may be turning to existing homes. I am thinking existing-home sales may stay stuck at 4.6 million annualized units.

The outlook for new home sales is slightly better. Sales are expected to increase from 440,000 units in February to 460,000 units in March. New home sales have been unchanged at very close to 450,000 units since October.