U.S. Economic releases showed resilience in the face of the severe weather; European releases indicated that its economy remained in expansion; but, the decline in the China's PMI caused concern because the index remained just barely inside the expansion zone. Nonetheless, equity and bond markets both rallied on the week; most equity markets finished strong in the month of February and generated positive year-to-date returns; bond market returns this YTD have rivaled the positive equity market performance. The U.S. dollar declined and commodity prices were mixed. Natural Gas prices dropped 25%, the biggest weekly decline since 1996; this was puzzling since the stockpiles are low from record low January temperatures and predictions are for lower-than-expected temperatures in March.

Perspective:

Next week's releases, the U.S. Employment Report and the PMI's, will be important first indicators of February's economic activity, but they will not be clear of the impact that cold weather has had on the U.S. economy. Reports in the months to come will help to determine whether the U.S. recovery is just resilient or can become robust once it is clear of the weather overhang.

I had a call this week from a friend who was concerned about whether he should be holding any bonds in his portfolio. Another friend told him that bonds were going nowhere but down. Investment grade bonds had generated negative returns in 2013. The long term decline in bond yields had come to a close, and, with that, the end of price appreciation for bonds. My friend was concerned.

I suggested that he look at the equity and bond tables in this report. He would see that interest rates had fallen in 2014 and credit spreads (the additional yield that the market demands to assume default risk) had narrowed. Bond markets have started the year on a positive note, even rivaling equity market returns. Yet, the two-month return does not mean that the year will be positive for bonds. The key is to understand the role that bonds play in the portfolio; bonds are not just for income, they also provide diversification, a cushion for those periods when equities might decline. Slower economic activity or geo-political crises often cause investors to abandon equities to seek the stability of bonds; this flight to safety raises bond prices during times when equity prices decline. The correlation is not perfect; there are times when both stocks and bonds rise, like this week, and times when they both fall. Yet, bonds play a role in managing the overall risk in one's portfolio even when they aren't expected to generate the highest returns.

Economic Releases:

New Home Sales (blue in the chart) rose 9.6% in January to 468,000, above the range of expectations and the highest level in the post-great-recession recovery. This was in contrast to last week's report on Existing Home Sales (green in the chart), which fell in January. In other U.S. housing news, the Case Shiller Home Price Index for November rose +0.8% on a seasonally adjusted basis, but fell -0.1% unadjusted from the previous month; the Index rose 13.4% from the previous year. The National Association of Realtor's Pending Home Sale Index rose just a tick to 95.0 in January from the upwardly revised December number.

Other Economic Releases

New Orders for Durable Goods in the U.S. fell -1.0% in January; ex-transporation, Goods Orders rose 1.3%, showing signs of improvement in U.S. manufacturing. Consumer Confidence slipped more than two points to 78.1 in February according to the Conference Board. Yet, the University of Michigan Consumer Sentiment Index rose four ticks to 81.6 in February. Fourth quarter U.S. GDP was revised a half over a half-point lower to 2.4%, close to the consensus expectations. The Chicago Purchasing Managers Business barometer rose two ticks to 59.8, at the high end of expectations for February. The weekly Initial Jobless Claims rose 14,000 to 348,000, but the four-week average of Claims remained unchanged at 338,250 the week of Feb. 22. Similarly, Continuing Claims rose 8,000 to 2.964 million, but the four-week average of Continuing Claims was just a bit lower than the previous week.

The Unemployment Rate in the European Union remained unchanged at 12% in January. The EC Economic and Industrial Sentiment improved in February, but the Consumer Sentiment fell. The German fourth-quarter GDP was unrevised at +0.4% as expected. The German IFO Surveys for Economic Sentiment and Current Conditions improved, but for Business Expectations slipped in February. German Retail Sales increased 2.5% and the Unemployment rate remained unchanged at 6.8% in January. The UK's fourth-quarter GDP was unrevised at +0.7%.

Japan's Markit Manufacturing PMI fell a point to 55.5 in February. Japan's Industrial Production rose +4.0% in January. China's CFLP Manufacturing PMI fell three ticks to 50.2, but remained just inside the expansion zone in February.

Equities Markets:

Most equity markets around the globe rose on the week, finishing off strong for the month of February. Although year-to-date results for the Dow Jones Industrials remained negative, both the S&P and Nasdaq finished the month with positive YTD returns. The S&P 500 closed at 1859, its 48th record close in the last 12 months, and finished the month of February up 4.3%, the best monthly performance since October.

Bond Markets:

Government Bond market yields fell and credit spreads narrowed in the final week of February. The combination of the falling interest rates and narrowing spreads generated returns in the Merrill Lynch Credit Markets that rivaled YTD returns of stocks, as shown in the table.

Currencies & Commodities:

The U.S. dollar fell against all four currencies on the week. On a YTD basis, the Yen, Pound and Euro did better than the dollar. Oil prices were mixed on the week and the spread between Brent and WTI narrowed. Natural Gas prices collapsed, gold inched higher, and Silver commodity prices increased on the week.