Why the Dow Jones Jumped Despite Weak Economic Data

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is up today despite weak economic data in the U.S. and China. The stock market jumped around noon as Federal Reserve Chair Janet Yellen gave a speech at the Economics Club of New York. As of 1:15 p.m. EDT the Dow was up 117 points, or 0.72%, to 16,380. The S&P 500 (SNPINDEX: ^GSPC  ) was up 0.66% to 1,855.

There were two U.S. economic releases today and three releases in China last night:

Report

Period

Result

Previous

Housing starts

March

946,000

920,000

Building permits

March

990,000

1,014,000

Industrial production

March

0.7%

1.2%

Capacity utilization

March

79.2%

78.8%

Chinese GDP growth

Q1 2014

7.4%

7.7%

Chinese retail sales YoY growth

March

12.2%

11.8%

Chinese industrial production YoY growth

March

8.8%

8.6%

YoY = year-over-year.

None of the U.S. reports were encouraging, but the Chinese reports showed the economy did not slow as much as many had feared. The two key reports here are U.S. housing starts and Chinese GDP growth. Housing starts rose to a seasonally adjusted annualized 946,000, up from a revised 920,000 in February but well below analyst expectations of 990,000. Building permits, a leading indicator of housing starts, fell by 2.4% to 990,000, missing expectations of 1.02 million. Housing-market activity has slowly been getting stronger since the depths of 2009 but is still well below the levels seen a decade ago. Today's data just shows that the U.S. housing market continues to slowly strengthen.

US New Housing Permits Chart

US New Housing Permits data by YCharts.

Meanwhile, China's economy has been propped up in recent years by politically directed government lending and infrastructure spending, which has led to large imbalances in the economy. These, coupled with restrictions on investment, have led to a housing bubble, as well as a credit bubble. The Chinese government has begun taking steps to mitigate these through actions to raise interbank lending rates and restrict unconventional lending. The effects were seen this past quarter in China's first-ever default of publicly sold bonds. Previously, government organizations would take all possible measures to prevent any default.

The restrictions on credit were expected to slow the economy's growth, but the Communist party is still targeting 7.5% GDP growth this year. However, recent import and export data has been far worse than expectations, causing analysts to lower forecasts for this quarter's annualized growth to 7.3%. Chinese GDP came in slightly above that at 7.4%, while retail sales and industrial production also beat expectations. Given that China is the world's second-largest economy, its economic data has a direct effect on many Dow stocks that have significant operations around the world.

The Dow Jones spiked upward at noon following Federal Reserve Chair Janet Yellen's speech at the Economic Club of New York. Yellen said the members of the Federal Open Market Committee believed the recent U.S. economic slowdown was the result of the harsh winter and did not represent a general slowing of economic activity. Yellen said it was "quite plausible" that the U.S. economy could return to full employment and stable prices within the next three years. The FOMC views "full employment" as an unemployment rate near 5.5% -- though that's not entirely accurate, given that many people are simply not looking for jobs or have part-time jobs, which is not reflected in the headline number. Yellen went on to talk about the challenges the Fed and the economy face and explained how the Fed would continue to communicate through its forward guidance; the Fed believes monetary policy is more effective when people understand what the Fed plans to do. Yellen's expectations that the economy will continue grow stronger pushed the Dow up at noon.

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