The Great Monetary Expansion

While winter weather will likely distort first-quarter economic data, accommodative monetary policy around the world means the long-term outlook remains positive.

March 05, 2015    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

The European Central Bank will this month begin a program of full-scale quantitative easing to match what the central banks of Japan, the U.K., and the U.S. have been doing for some years now. The People’s Bank of China, by cutting its benchmark deposit and lending interest rates by 25 basis points last Saturday, provided further evidence—if any was needed—that the global economy will remain flush with liquidity for some time to come. The takeaway from this is that the great global monetary expansion is far from over and the outlook for stocks remains positive.

With regard to economic data here in the United States, we are potentially headed toward a period marred by winter distortions. This is nothing new. In the early months of 2014, key economic data points such as housing, retail sales, and even employment were negatively impacted by an extended winter cold snap. When the economy shrank by 2.1 percent in the first quarter of 2014, investors debated the fundamentals of the American economy. Of course, the economic soft patch of early 2014 proved temporary and the economy quickly regained momentum upon the arrival of the spring thaw. If similar factors are now at play, economic activity may be temporarily delayed, but not canceled.

If we do begin to witness a similar softening in economic data over the coming weeks, debate around the fundamentals of the U.S. economy will likely start afresh. Investors may even begin to question the Fed’s appetite for raising rates. However, I believe the underlying economy remains exceptionally strong and investors should not be panicked by seasonal setbacks. Indeed, considering the strength of the U.S. economy and the wave of liquidity emanating from various central banks around the world, the general investment environment should remain attractive.

Winter Weather May Weigh on Q1 Housing Activity

Last year, first-quarter gross domestic product was severely affected by cold weather and heavy snowfall, a pattern that could repeat itself this year. Measured by deviations from monthly average temperatures, last month was the coldest February since 1979. One of the most notable signals of the effect of winter weather last year was a slowdown in housing activity. With housing key to the ongoing recovery, first-quarter GDP may surprise to the downside due to the weather.

U.S. Temperatures and Existing Home Sales

Winter Weather May Weigh on Q1 Housing Activity

Source: Haver, Bloomberg, Guggenheim Investments. Data as of 3/2/2015. LHS = left-hand side. RHS= right-hand side *Note: Temperature data is a population-weighted average. Deviation from normal is defined as deviation from monthly average since 1970.

Economic Data Releases

Mixed Data in the U.S. as ISM Readings Diverge

  • Fourth-quarter GDP was revised down from 2.6 percent to 2.2 percent, mostly due to a wider trade deficit and less inventory buildup.
  • Personal income rose 0.3 percent in January, slightly under expectations of 0.4 percent.
  • Personal spending fell for a second straight month in January, down 0.2 percent.
  • The ISM manufacturing index declined in February, to a 13-month low of 52.9.
  • The ISM non-manufacturing index rose slightly in February, to 56.9 from 56.7. The employment sub-index rebounded solidly.
  • Factory orders contracted for a sixth straight month in January, falling 0.2 percent.
  • The University of Michigan Consumer Sentiment Index was revised higher in the final reading for February, to 95.4 from 93.6.
  • Initial jobless claims unexpectedly rose for the week ending Feb. 28, to 320,000, the highest since May of last year.
  • The core PCE deflator was unchanged at 1.3 percent year over year, while the headline number declined to 0.2 percent from 0.8 percent.

Euro Zone Deflation Slows, China PMIs Rebound

  • The Consumer Price Index estimate for the euro zone improved in February to -0.3 percent year over year, up from -0.6 percent. Core price inflation was steady at 0.6 percent.
  • Euro zone retail sales had the best monthly gain since 2011 in January, rising 1.1 percent.
  • Consumer prices in Germany rose much more than expected in February, up 1.0 percent from a month earlier and putting the year-over-year rate at -0.1 percent.
  • Retail sales in Germany beat expectations in January, rising 2.9 percent, the best month in seven years.
  • The U.K. manufacturing Purchasing Managers Index was better than expected in February, rising to a seven-month high of 54.1.
  • The CPI in Italy exited deflation in February, rising 0.1 percent from a year earlier.
  • The HSBC China manufacturing PMI rebounded in the final February estimate, up to 50.7, the highest since July.
  • The HSBC China services PMI ticked up in the February reading, to 52.0 from 51.8.
  • Japan’s CPI remained at 2.4 percent year over year in January. Prices excluding food ticked down from 2.5 percent to 2.2 percent.
  • Japanese industrial production rose 4.0 percent in January following a 0.8 percent increase in December. The one-month change was the largest since the aftermath of the 2011 earthquake.


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Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

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In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”

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