Will March 2013 Be Another Swing Month?

Key economic indicators and market events for March by Joe Terranova, Chief Market Strategist
March proved to be a swing month for equities in 2012. After a strong rst quarter topping out in early April, markets didnt recover until early September. This year is tracing out eerily similar. Will March again mark the beginning of a momentum swing and pause in market appreciation? The potential exists for headwinds to form around the U.S. sequester spending cuts and the heating up of a currency devaluation contest between the euro and the yen, currently the funding currency of the global carry trade. Whether March 2013 proves to be a swing month for the market may ultimately be decided by the ISM Manufacturing and U.S. Labor reports early in the month.

March 2013
Sunday Monday Tuesday Wednesday Thursday Friday
1 10:00 AM:

Saturday
2

U.S. ISM Manufacturing European PMIs U.S. Sequestration Takes Effect

3 4 10:00 AM: 5 2:00 PM: 6 7 8 8:30 AM: 9

U.S. ISM Non-Manufacturing

Beige Book

ECB Meeting China Trade Data

U.S. Labor Report China CPI

10

11

12 8:30 AM:

13 1:00 PM:

14

15

16

Germany Trade Data

U.S. Retail Sales

1:00 PM:

U.S. 30-Year Treasury Auction

U.S. 10-Year Treasury Auction

17 18 19 8:30 AM: 20 21 22 23

China Property Price Index

BOJ Governor Steps Down

U.S. Housing Starts & Building Permits

FedEx Earnings*
12:30 PM:

FOMC Announcement
2:15 PM: Fed Chair

Press Conference
24 25 26 27 28 29 30

2013 BRICS Summit, South Africa

31

Continuing Resolution to Fund U.S. Government Expires

Good Friday Markets Closed

China PMI

Times shown are Eastern Time. *Expected earnings release date; may be subject to change.

March indicators / events of note:

U.S. ISM Manufacturing Index Issued by the Institute of Supply Management, this report provides an inuential monthly measure of the health of U.S. manufacturing based on an in-depth survey of 300 manufacturing rms. An index value of 50 is the dividing line between an expanding or slowing economy. Data released is for the previous month.

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I would categorize this report as an important table setter for March. Last months ISM reading was 53.1, the highest since 54.1 in April 2012. Estimates for this month fall slightly short of that, potentially to 52.5. I would look at the new orders component, which rose 3.6 points last month to 53.3, the employment component, which rose 2.1 points to 54, and the new orders-to-inventory gap, which now stands at 2.3. If there were one discouraging thing about last months report it was that inventories rose sharply from 43.0 to 51.0, so Im going to watch that gap very closely in this report. A contraction into negative territory would signal that demand or growth of new orders is not accelerating as last months report suggested. Last month, Italy PMI was 47.8; this month, were looking for it to be around 47-47.5. I still believe France is Europes economic weak link. Last month, France PMI was 43.6; that could decline to about 43.4. Last month, Germany PMI was 50.1, and the jury is out on what side of 50 it will come in this month. The U.K. PMI looks like it will be somewhat unchanged from last months 50.8. House Speaker Boehner and President Obama remain at odds on this issue, and I expect the spending cuts to be enacted. This will set up an ironic push-pull dynamic for the markets on March 1. Will investors rather focus on sequestration spending cuts and a Washington thats divided once again, or on potentially improving economic data in the China PMI data released the night before and the U.S. ISM Manufacturing report being released that same day? There is a degree of caution that the services side of the economy may have peaked at the end of 2012, and this months ISM Non-Manufacturing Index will likely provide further evidence of the slowdown. In fact, it would be a surprise if the index exceeded last months 55.2 reading, which was down from the previous months 55.7. Keep in mind that the services industry is working with a consumer who has slightly less disposable income in 2013. I am elevating the market relevancy of the Beige Book this month. Not only will it provide a picture of the near-term economy, it will set the agenda for the March FOMC meeting and the potential battle between doves and hawks.

European PMIs PMIs (purchasing managers indexes) for European countries are reported on March 1. Each countrys PMI is a key measure of the state of its manufacturing sector. An index value above 50 indicates growth, below 50 contraction.

U.S. Sequestration Takes Effect $85 billion worth of automatic federal spending cuts take effect on March 1.

U.S. ISM Non-Manufacturing Index The index is based on surveys of nearly 400 rms from 60 sectors across the U.S., including agriculture, mining, construction, transportation, communications, wholesale trade, and retail trade. The index provides the economic backdrop for the various markets, and consists of data on business activity, new orders, employment, and supplier deliveries. Beige Book FOMC commentary on current conditions in each of the Federal Reserves 12 districts is released two weeks prior to the next FOMC meeting. This months Beige Book is for the March 19-20 meeting.

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March indicators / events of note:

ECB Monetary Policy Meeting The European Central Bank (ECB) holds its monthly monetary policy meeting on March 7.

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At the February ECB meeting, President Mario Draghi verbally intervened to talk the euro currency lower. This posed a risk for a counter-rally in the U.S. dollar that would hurt equities. However, the euro, which was trading at 1.37 on February 1, recently dropped below 1.31. Much of the selloff was predicated on Draghis comments regarding the need for euro currency appreciation to moderate. Since 2009, 3.5% of euro zone GDP growth is attributed to exports, highlighting just how important exports are to Europe. I question the relevancy of last months report, which showed a $29.2 billion trade balance surplus. Year on year, exports were up 25% and imports were up 28.8%. Although those were very strong gures, well ahead of consensus, they were distorted by the Chinese New Year. Ill be interested to see if we get a reversion to the mean this month. In fact, I would expect the export and import numbers may reveal single-digit year-on-year growth at best. Last month, 157,000 jobs were added to the headline number and 166,000 jobs were added to private payrolls. I expect we will shave 10,000 to 20,000 off those gures this month and that the unemployment rate will remain at 7.9%. A turnaround in the unemployment rate will be predicated on an increase in the labor force participation rate, currently at the historically low level of 63.6%. The labor force participation rate has been falling signicantly, from just over 66% in 2007, to below 65% in 2010, and breaking below 64% last year. Last month, China CPI was 2%, a long way from the 6.5% attained in July 2011. We havent seen a 3% print since last spring, with the last eight reports falling in the 1.7% to 2.5% range. Neither do I expect much change this month, nor do I expect a signicant shift in Chinas monetary policy. For now, Chinas economic situation remains status quo. German exports last month were up only 0.3%, and imports were down 1.3%. Germanys exports are of signicant relevance to the euro currency and therefore of great concern to the ECB. Germanys equity index, the DAX, has underperformed this year relative to other major developed global equity indices. I do not expect a surge in Germanys trade data, and the degree of signicance it has to the markets is moderate. However, I have included this data as a potential outlier in the event we get an extremely negative number.
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China Trade Data Chinas monthly trade report provides important import, export, and interest rate data on the Chinese economy.

U.S. Labor Report Private payroll data is part of the Labor Departments monthly U.S. Employment Situation report. This data gives the true employment story, is the best gauge of the economys direction, and has the power to move markets.

China CPI Chinas consumer price index (CPI) is a monthly measure of ination.

Germany Trade Data Germanys monthly trade report is released by the Federal Statistical Ofce in Wiesbaden.

March indicators / events of note:

U.S. Retail Sales Retail sales data is released monthly by the U.S. Department of Commerce. Retail sales measure total receipts for sales of durable and nondurable goods. Consumer spending accounts for two-thirds of GDP and is therefore a key element in economic growth. Each report is based on the previous months data. U.S. Treasury Auctions > 10-year Treasury March 13 > 30-year Treasury March 14

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As weve seen, the services side of the economy appears to be moderating from peak levels in 2012. The expiration of the payroll tax has put less in the consumers pocket, the consumer discretionary sector is underperforming year to date, and weakness has been reported in many retail corporate stories. Last months retail sales were up only 0.10%, and it will be important to avoid a signicant contraction in this report. Funds have been owing out of Treasuries, but not to the point of spiking yields signicantly. For all the chatter about potentially higher yields, the 10-year T-note has only risen to 2.06% this year, not even close to the 2.25% levels of a year ago. Based on asset ows, the Street may be getting out of Treasuries and agencies but they are clearly overweighting taxable high yield, investment grade, and municipal bonds. This report has impact on the basic materials space. In recognizing that property prices have risen signicantly, the Chinese have suggested that they will attempt to cool property prices, not through monetary policy but through scal policy. Any cooling in property pricing would also mean reduced demand for building materials, such as steel and copper. The new BOJ governor is expected to be Haruhiko Kuroda, currently president of the Asian Development Bank. Mr. Kuroda is extremely dovish and is expected to embark on an all-out assault to depreciate the yen currency as much as he possibly can. The housing recovery remains steadfast. In fact, we are now going into the housing markets seasonally strong period. Whats encouraging for both the economy and the equities market is that we are nally seeing housing prices accelerate, which has a positive wealth effect on American consumers. That positive wealth effect can counterbalance rising gas prices and less takehome pay. Last month, we had the largest month-on-month gain in housing prices since 1993, and the western region, which had been suffering the most, was the strongest. I consider FedEx to be an excellent barometer on the state of global commerce. FedEx hit a high on February 8 of $107.50. The Street will be looking for earnings of about $1.40.
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China Property Price Index Monthly data released by Chinas Bureau of National Statistics provides pricing information for both new and pre-owned housing in 70 major cities across the country.

Bank of Japan Governor Steps Down Current BOJ Governor Masaaki Shirakawa will step down on March 18. Shinzo Abe, Japans prime minister, will appoint a new governor. U.S. Housing Starts & Building Permits The Commerce Departments monthly housing starts report is the most closely followed report on the housing sector because it discloses the number of new residential buildings under construction in the U.S. The report is based on the previous months data.

FedEx Earnings* FedEx (FCX) is expected to release earnings on March 20.

*Expected earnings release date; may be subject to change.

March indicators / events of note:

FOMC Meeting Announcement and Fed Chairman Press Conference The Federal Open Market Committee (FOMC) releases its monetary policy announcement after its March 19-20 meeting, which will be followed by Chairman Bernankes quarterly press brieng.

You should be watching:

More than anything else this month, investors should not expect the removal of easy monetary policy any time soon. Last years March FOMC meeting was the catalyst that swung the momentum in the market, ending the rally in 10year Treasury yields and halting the appreciation in equities shortly thereafter. I do not expect a similar outcome this year. Given the FOMCs voting members now number more doves than hawks, I expect continued easy monetary policy, especially in light of competitive global currency devaluation. While the very hawkish Esther George is still a voting member, her like-minded colleagues Charles Plosser, Richard Fisher, and Jeffrey Lacker are not. This should allow Mr. Bernanke to maintain a dovish stance. Its time to pay attention to the BRICS summit. These economies seat at the global table will become more important, especially for investors with exposure to emerging markets. Their contribution to global growth continues to accelerate, and their voice is going to be heard more and more in terms of global economic policy. Is this meeting market moving? No, but we need to know how the developing world is handling its debt and its impact on their currencies. For instance, the yen is weakening signicantly and a byproduct is that it may take down the currencies of some emerging Asian economies and reduce their spending powers. Collectively, the BRICS nations will send a signal to developed economies on how to manage the debt in their currencies. The continuing resolution to fund the U.S government is what investors need to focus on. In fact, there is far more relevancy to this March calendar event than the March 1 sequestration. There exists the very real potential for a temporary U.S. government shutdown and a ceremonial downgrading of U.S. credit. Ironically, this deadline happens just as the markets are preparing for a Good Friday-shortened holiday weekend. China PMI readings have been muted, coming in at 50.4 last month and 56 the previous month. In fact, PMI has been stuck in a range since May 2012, between 49.2 and 50.6. A year ago, we were at 53.3. In terms of investment strategy, Im not seeing any growth acceleration in the Chinese economy, just ho hum for now. Nothing bad, nothing good.

BRICS Summit The fth summit meeting of the emerging economies of Brazil, Russia, India, China, and South Africa will be held in Durban, South Africa on March 26-27. These summits are convened to seek common ground on areas of importance for these major economies.

Continuing Resolution to Fund U.S. Government Expires The Continuing Resolution (CR) to fund most U.S. government operations expires on March 27.

China Manufacturing PMI China PMI (purchasing managers index) is released on the last day of the month. This monthly gauge of Chinas manufacturing sector, combined with the monthly U.S. ISM Manufacturing Index value released the next day, gives a clear picture of global manufacturing health. An index value above 50 indicates growth, below 50 contraction.

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JOSEPH M. TERRANOVA, Chief Market Strategist, Virtus Investment Partners Joe Terranova is chief market strategist for Virtus Investment Partners. He was elevated to that position in June 2009, having started with the company in the role of chief alternatives strategist. In his current role, Mr. Terranova works with Virtus regional sales teams and the nancial advisors who sell the companys investment products, providing insight into the domestic and global investing landscape and has represented Virtus as a keynote speaker for several nancial institutions. He is a member of the Virtus Investment Oversight Committee. Prior to joining Virtus in 2008, Mr. Terranova spent 18 years at MBF Clearing Corp., rising to the position of director of trading for the company and its subsidiaries. In this capacity, he managed more than 300 traders and support staff for MBF, one of the New York Mercantile Exchanges largest rms. His work was highlighted as the feature story in the June 2004 issue of Futures magazine. Mr. Terranova is perhaps best known for his risk management skills, honed while overseeing MBFs proprietary trading operations during some of the most calamitous times for the U.S. markets, including the rst Gulf War, the 1998 Asian Crisis, 9/11, and the collapse of Amaranth Advisors. In 2003, he was one of the rst Wall Street professionals to make an early call for higher energy, natural resources, and commodity prices. In June 2008, he cautioned investors to move to the sidelines in commodities and, in March 2009, he encouraged investors to ignore the global embracement of pessimism and overweight equities. Before joining MBF, Terranova held positions at both Swiss Banking Corp. and JP Morgan Securities. Mr. Terranova has been an ensemble member of the CNBC Fast Money franchise since 2008. He also frequently contributes exclusively to CNBCs other business programs. He is the author of Buy High, Sell Higher (Business Plus, 2012), a book about the new rules of investing based on his years as a professional trader. In 2007, Mr. Terranova and Hockey Hall of Fame player Mike Bossy established Bossys Bunch, a program that rewards excellence in the classroom for elementary school students. Mr. Terranova earned a bachelors degree in nance from the Peter J. Tobin College of Business at St. Johns University in New York.

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This commentary is the opinion of Joe Terranova. Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates, or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.
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