While the economy strives to shrug off the effects of an abnormally cold winter, expectations of both producers and consumers appear to have a greater role than ever in the direction the economy is headed.
This week saw economic releases impacting both demand and supply for goods and services in the economy. Producer-related (XLI) economic data included the Chicago Fed’s National Activity Index (or CFNAI) and the Markit PMI Manufacturing Index Flash, which cover the whole economy, as well as the Richmond Fed’s manufacturing survey, which covers businesses and economic activity in the Fifth District. While the CFNAI and the Markit PMI were up, the Richmond Fed’s manufacturing survey recorded a decrease over February’s reading. However, manufacturers expect a pick-up in both shipments and orders over the next six months.
Consumer-related releases included the Conference Board’s Consumer Confidence Index, which rose to a six-year high, based on consumers’ outlook for job prospects and the economy. The ICSC-Goldman Sachs Store Sales Index and the Johnson Redbook Index affected the retail sector. While consumer sentiment was high, this didn’t reflect in retail spending (RTH) patterns, as represented by the two retail indices.
Fed Chair Janet Yellen on housing market expectations
There were also three important housing sector (ITB) releases that impacted both demand for new homes as well as market price trends. New home sales figures released by the U.S. Department of Commerce Census Bureau were down from February, fanning fears that the housing sector (ITB) was slowing down.
However, as Fed Chair Janet Yellen mentioned at the March FOMC meeting, “There’s a lot of demographic potential there for new household formation that would ultimately generate new construction… And the level of rates I think does matter, and the fact that they’re low now is something that should serve as a stimulus to people coming back into the housing market.” This may be one of the factors the Fed considered in tapering monthly asset purchases by $10 billion at this month’s FOMC.
Other housing releases included the FHFA House Price Index and the S&P Case-Shiller Home Price Index. Both indices were up—which may have deterred home purchases.
We’ll discuss these releases in detail over the coming parts of this series. ETFs mentioned in this part include the following.
- The iShares 10-20 Year Treasury Bond ETF (TLH) tracks the Barclays Capital U.S. 10–20 Year Treasury Bond Index. An increase or decrease in long-term Treasury purchases by the Fed would impact ETFs like TLT.
- The iShares Barclays MBS Fixed-Rate Bond Fund (MBB) tracks the Barclays Capital U.S. MBS Index—a measure of the performance of investment-grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC. An increase or decrease in mortgage rates would impact ETFs like MBB.
- The iShares US Home Construction ETF (ITB) tracks the performance of the Dow Jones U.S. Select Home Construction Index—a measure of the performance of the home construction sector of the U.S. equity market. Housing releases would impact ETFs like ITB.
- The State Street Industrial Select Sector SPDR (XLI) includes companies from the following industries: industrial conglomerates, aerospace and defense, machinery, air freight, and logistics, road and rail, commercial services and supplies, electrical equipment, construction and engineering, and building products, airlines, and trading companies and distributors. An increase in manufacturing activity is likely to benefit all these industries and impact ETFs like XLI.
- The VanEck Vectors Retail ETF (RTH) tracks the VanEck Vectors US Listed Retail 25 Index. The index is designed to track the overall performance of the 25 largest publicly listed retailers in the U.S. An increase or decrease in consumer sentiment and retail spending would impact ETFs like RTH.
To find out how the March reading for a nationwide measure of economic activity, the Chicago Fed’s National Activity Index, will impact investors, read on to Part 2 of this series.