The level of the WTLEI remained flat last week amongst mixed economic and sentiment data. This week will bring 3 leading indicator readings including the Empire Fedat 8:30 ET, the NAHB index at 10:00 ET, and the Philly Fed at 10:00 ET. Stay tuned!

One of the most interesting puzzles of financial market research of late has been to explain the Q2 soft patch phenomenon of recent years. Is it just a mere coincidence that the economy has lost steam in Q2 in each of the past three years? Doesn’t it have something to do with seasonal adjustment perhaps? Maybe this is one of the characteristics of the “new normal?” The answer, in our opinion, lies not in the commonality of Q2 but rather in the commonality of Q4/Q1. Indeed, each of the past three years has witnessed a resurgence of inflationary pressures in the fourth quarter and the beginning of the year. As we see it, this is what ends up pressuring the economy and giving us softer conditions in the spring.

The level of the WTLEI declined on broad-based weakness. The LEI tally for March thus far is 8 down and 4 up. It will be a quiet one as there are no regional releases on the docket. The Empire Manufacturing Index will be the first release for the month of April. Stay tuned!

The S&P 500 closed out the quarter with a spectacular gain. While we expected equities to be up in the first quarter we never really thought the market would make it past 1,500. Interestingly, the top three sectors YTD in terms of performance are Healthcare, Staples and Utilities. This is a true risk-off rally. It makes sense to us that counter-cyclicals would be doing “relatively well”. After all, the NAHB index and other leading indicators have lost steam in Q1. So sector-wise this makes sense and we expect it to continue …. market-wise it is confusing and hard to see the sustainability in the rally.

A 5-Minute Update With François Trahan – Mar 26, 2013

Near-Term Risks Remain For U.S. Equities
- Bellwether Fundamentals Signal Caution Ahead
- The Spring Slowdown Has Been A Recurring Theme In The New Normal
- Bullish Sentiment Is Still At An Extreme

Recovery In Inflation Has Been Muted Courtesy Of A Rising Dollar
- U.S. Consumers Have Historically Benefitted From Foreign Economic Crises
- Events in Cyprus Have Improved The Dollar And, Simultaneously, The U.S. Consumption Outlook
- Abenomics Limits Downside Risks To U.S. Dollar

When you open up your Wall Street Journal this morning, make sure to note the first two articles because there is an underlying link between them which may not be so obvious. On the surface, the articles “Cyprus Gets New Bailout Deal” and “Investors Pile Into Housing, This Time As Landlords” sound like they have little to do with one another. But they do! Indeed, we believe that U.S. consumers should not be thanking the Fed, but instead appreciating the accommodative environment that growth concerns overseas have created for our economy. For if it was not for perennial crises in the Eurozone, interest rates in the U.S. would likely be higher and the U.S. dollar would certainly be weaker. This cause-and-effect relationship between the international economy and U.S. consumers is nothing new. U.S. consumers have been benefitting from foreign-country crises for several decades.

A 5-Minute Update With François Trahan – Mar 19, 2013

We Are Very Bullish On The Outlook For Housing
- Housing Activity To Continue Rising In The Wake Of Homebuilder Optimism
- Home Prices Likely Still Have Some Room To Move Higher

We Are Bearish On Leading Indicators Of Housing
- March NAHB Reading Disappoints Every Bloomberg Estimate
- Homebuilders Say Higher Inflation Is Putting Pressure On Sentiment
- Several Anticipatory Measures Point To Continued NAHB Weakness

Investment Implications Of A Decline In The NAHB
- A Softer NAHB Usually Followed By A Softer Stock Market
- Homebuilder Stocks Are Most At Risk If The NAHB Continues To Stall

We always expected the market to do well in the H1 2013. That said, we never thought it would do this well! Our call was for U.S. equities to lose momentum in the first half of the year and for the S&P 500 to trade somewhere in the 1,400 to 1,500 range before inflation put pressure on stocks in the back half of the year. The good news for the U.S. market is that the lone source of inflation out there (China) has lost some momentum itself in the past six weeks. In fact, the Chinese stock market is now down on the year. As we see it, it is not a coincidence that the U.S. market has rallied while Chinese stocks have stalled. The two indices are now negatively correlated and we have long argued that China’s easing is America’s tightening and vice versa. The question from here is can this dynamic continue?

A 5-Minute Update With François Trahan – Mar 12, 2013

Beware Of Market Complacency … Here’s What’s On Our Watch List
Gasoline: Wholesale Gasoline Prices At New Cycle High … Will There Be More Pain At The Pump?
Economic Surprises: The 14% Rise In Oil Prices Is Poised To Weigh On Economic Surprises Imminently
Housing LEIs: The Implicit Tax Of High Prices May Be Taking Potential Buyers Out Of The Market
Consumer Confidence: High Prices, Especially Within Energy, Are Poised To Weigh On Consumers
Market Internals: Global-Sensitive Industries Beginning To Outpace Domestic Beneficiaries

The U.S. economic news is about as good as it has been since the recovery began in 2009. What is debatable is the reason behind the improvement. In our opinion, it is not a coincidence that this improved state of the economy has occurred in the wake of a major decline in inflation during 2012. Indeed, we have shown time and time again that leading indicators of the U.S. business cycle are more tightly correlated to inflation trends nowadays than they have ever been. The same can be said with the S&P forward multiple which now has a 72% correlation rate to U.S. inflation trends. The “New Normal” has left us with a fairly straightforward approach to forecasting: where inflation goes, the U.S. economy follows (the other direction of course).