Good News for Factories Fails to Excite
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
The stock market traded in a narrow range again on Thursday, following favorable news on the U.S. economy for last month. The headline numbers indicated that manufacturing rose while inflation fell during January. This should have been good news for both the stock market and the bond market, but the most the stock market could muster was a shoulder shrug, while the bond market retreated. However, the devil was in the details as investors combed through the reports to find manufacturing was less than favorable and that core inflation had actually gone higher.
For the month, durable goods orders rose 2.8 percent, as new orders were placed with U.S. manufacturers. In short, people bought more stuff last month, reversing the prior month’s decline after new orders fell 3.7 percent during December. Digging a little deeper in to the report, the economic picture wasn’t quite so rosy, as new orders were spotty at best across industries. The big winner last month was in orders for nondefense aircraft, which gained 128.5 percent, followed by transportation, which rose 9.1 percent for the month. Some notable areas that came in weaker than expected were motor vehicles, down 2.9 percent, and defense aircraft, lower by 6.5 percent.
On Thursday, we also learned that the consumer price index (CPI) fell a sharp 0.7 percent during January, after declining 0.3 percent in December. The headline inflation number has been falling for several months now thanks to falling oil prices. Last month was no different, with energy prices dropping 9.7 percent, not to mention an 18.7 percent decline in the price of gasoline. On the other hand, the price of food was unchanged after rising 0.2 percent the prior month.
Take out the change in energy and food prices from the CPI and you get core inflation. When falling energy prices are removed from last month’s figures, core inflation actually rose 0.2 percent for the month, a year-over-year increase of 1.6 percent. As it turns out, it appears the decline in bond prices was actually in response to the increase in core inflation.
This week, the top-performing bonds were mostly dominated by higher-quality longer maturity bonds, with the Barclays U.S. 20+ Year Treasury index higher by 1.80 percent over the past five trading days, followed by the BofA Merrill Lynch Build America Bond index rising 1.54 percent over the same period. Getting honorable mention and a potentially new rising star is the J.P.Morgan Emerging Market Bond Global Core index, gaining 0.96 percent over the past week.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.