Market commentary: The economic data that spooked the equity markets

Investors were closely watching the economic data due this week after the Federal Reserve officially opened the door for an interest rate increase last week, linking it to a further improvement in economic indicators. This week four important set of data were released: US Existing Home Sales on Monday, US New Home Sales on Tuesday, along with February’s Inflations data, and US Durable Goods on Wednesday. 

With most of market participants looking at these economic data in an attempt to grasp any hint related to the timing, pace and size of the coming interest rates hike, investors got spooked by somewhat disappointing data, with equity markets across the globe taking a hit and posting sizable losses throughout the entire week.

The week opened with US Existing Home Sales statistics that showed a smaller rebound than expected, with sales increasing only by 1.2% to an annual rate of 4.88 million units, below economists’ forecasts of 4.9 million units. Harsh weather, and the undersupply of properties have consistently pushed prices higher and sales lower, impacting negatively the real estate sector.

Data also showed a concerning trend with properties prices growing at a much faster rate than wages, making houses across the country less and less affordable despite the abundance of liquidity and mortgage rates at multi-year lows.

In contrast, US New Home Sales, released on Tuesday, showed a strong growth with sales jumping 7.8% to a seasonally adjusted annual rate of 539,000 units, the highest level in seven years. While this was clearly a good news and a sign that the house market is continuing to improve, higher sales also resulted in a decline of the stock of new houses, which is likely to support further increases in prices, contributing to diminish properties’ affordability.

Core Inflation readings were also positive, with consumer prices rebounding thanks to higher gasoline prices, which rose for the first time since last June. Once again, while the data perse was good news, it also confirmed that the FED is on track to raise interest rates this year.

Despite investors welcoming an inflation that is finally accelerating, they also see a consistently improving inflation as being supportive of the need to raise interest rates, which will surely put some downward pressure on both bond and equity markets.

If Tuesday proved to be a positive day, Wednesday’s US Durable Goods data proved to be a complete disappointment. Data showed that durable goods orders for the month of February declined 1.4% on a seasonal adjusted basis, suggesting that US companies are still cautious and concerned of the negative implications of a weaker than expected demand and the strengthening of the US dollar.

The disappointing data for durable goods is adding up to falling retail sales, declining business investment indicators and weaker than expected manufacturing production data, prompting analysts and economists to lower their forecasts for the country’s first quarter output.

The reaction of investors to the latest economic data and a worsening geopolitical environment, dominated by a deterioration in the Greek’s negotiations and the bombing of Islamic rebels in Yemen by Saudi Arabia, was an equity sell-out across the board. The Dow Jones Industrial Average lost 522 points over the last 3 sessions, closing at 17,678.23, 2.87% down from its Monday’s high. The S&P 500 retreated by 56 points, dropping 2.65% throughout the week and closing at 2,056.15 on Thursday.

The Nasdaq recorded its worst drop in over 5 months, shedding 163 points, dragged down by plunging tech and biotech stocks. The Nasdaq Composite Index lost around 3.24% since the beginning of the week, indicating that a correction may be on the horizon.

While these dips may offer an interesting entry point after last week rally following the FOMC meeting, investors should also be cautious to jump into a volatile market that is still close to record highs, as further declines may very well materialise in the coming days.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

More in Business Comment
Boris Johnson agrees Brexit deal with EU | Calamatta Cuschieri
Markets end mixed | Calamatta Cuschieri
Business Comment
Calamatta Cuschieri
Pound jumps as Barnier says Brexit deal “possible” | Calamatta Cuschieri
Markets advance on trade talks | Calamatta Cuschieri
Business Comment
Calamatta Cuschieri