Busy busy busy, and is the US economy feeling a slight chill?

Last week’s US economic data dump probably did not do anything to change the view of many in the investment community about the state of the US economy. It would also appear that news that does not fit the current narrative is excused or dismissed. If one looks at the headline level, last week’s Durable Goods orders were a tad weaker than expected, but much of that was attributed to the woes at Boeing. The previous week’s PCE income and expenditure index came in slightly higher than forecast, suggesting getting inflation down the last leg to the 2% target is proving slightly tougher, only for one economist to dismiss this as “noise”. The Manufacturing  ISM remains depressed, dropping to 47.8 from 49.1, slightly at odds with the more positive messages from the S&P Global PMI and Fed Manufacturing surveys. The Chicago PMI dropped to 44 from 48, just as a reminder anything below 50 indicates contraction. Consumer confidence dropped modestly, possibly attributable to a modest rise in gas prices. This drop in consumer confidence was mirrored by the Monthly Michigan Consumer Confidence survey, which was revised downwards. But again according to Pantheon macro research not to the extent that suggests spending remains robust. On top of all this, the Fed reiterated that they are in no mood currently to consider cutting interest rates. Q4 second estimate for US GDP was also revised down slightly.

What did two-year US treasury yields do in the past month, you rightly ask, considered the most sensitive to changes in interest rate sentiment? The 2-year US Treasury yield started the month at 4.2% and finished at 4.64% as a result the yield curve flattened over the month. By the end of the week, the S&P 500 had hit 5100, and several street analysts’ year-end targets have been met and raised. Gold weirdly a supposed store of value in uncertain times hit a new record of $2100. The Economist this week headlines, “How high can markets go”? Many seasoned investors are being asked for their views on a stock market bubble. Not yet seems to be the consensus.  Of course, one does not have to be in a bubble for prices to go down, if the US economy slows.

This week the UK will be focussing on Jeremy Hunt’s budget and how much of his spare 20 billion he will give away. What else can he do to squeeze a little more from some areas, pensions being the go-to for so many modern Chancellors, to grab a few more headlines and scrape the money together, as the FT so succinctly describes it, to fund a package to help claw back some of the many disaffected Conservative voters. Good luck with that, then. To my mind, it simply cuts corporation tax, provides incentives for investment, and additional profits get recirculated back into the economy, employers can pay better. Of all the mistakes this Government has made, raising corporation tax feels the worst, but what do I know?

For the week ahead the services and composite PMIs for Feb will be closely studied, the US labour market will be in focus and Jerome Powell will report to Congress with his semi-annual Monetary policy report. The ECB meet on Thursday to decide to leave interest rates where they are.