What I’m Watching This week – 18 April 2016

The Markets (as of market close April 15, 2016)

Despite inflationary trends slowing as retail and producer prices fell in March, stocks gained over the past week, buoyed by better than expected first-quarter corporate earnings reports. Each of the indexes listed here posted gains led by the Global Dow and the Russell 2000, followed by the large-cap Dow and S&P 500, which have risen about 14.0% since their February lows.

The price of crude oil (WTI) closed the week at $40.40 a barrel, up $0.74 over the prior week’s closing price. The price of gold (COMEX) fell by last week’s end, selling at $1,235.80 by late Friday afternoon, down from the prior week’s closing price of $1,240.10. The national average retail regular gasoline price fell for the first time in eight weeks, selling at $2.069 per gallon on April 11, 2016, $0.014 under the prior week’s price and $0.339 below a year ago.

Market/Index 2015 Close Prior Week As of 4/15 Weekly Change YTD Change
DJIA 17425.03 17576.96 17897.46 1.82% 2.71%
Nasdaq 5007.41 4850.69 4938.22 1.80% -1.38%
S&P 500 2043.94 2047.60 2080.73 1.62% 1.80%
Russell 2000 1135.89 1097.31 1130.92 3.06% -0.44%
Global Dow 2336.45 2287.60 2367.41 3.49% 1.33%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.71% 1.75% 4 bps -51 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Prices consumers paid for goods increased slightly in March, indicating only marginal inflationary pressures in the economy. The Consumer Price Index rose 0.1% in March from February, according to the latest information from the Bureau of Labor Statistics. Over the last 12 months, the index rose 0.9%, a slightly smaller increase than the 1.0% change for the 12 months ended February. The food index declined 0.2% in March, while the indexes for energy (0.9%) and for all items less food and energy (0.1%) increased, leading to the slight seasonally adjusted increase in the all items index. The gain in the index less food and energy, referred to as core prices, was the smallest increase since August. The core prices index has risen 2.2% over the last 12 months–down 0.1% from the 12-month period ended February. Despite rising in March, the energy index has declined 12.6% over the last year.
  • In another report from the Bureau of Labor Statistics, real average hourly earnings for all employees increased 0.2% from February to March due to the increase in real average hourly earnings combined with no change in the average workweek. In fact, average hourly wages increased 0.3%, which is offset by the 0.1% increase in the Consumer Price Index referenced above.
  • Overall, receipts for retail goods and services sold to consumers fell in March, according to the U.S. Census Bureau. Advance estimates of U.S. retail and food services sales fell 0.3% from the previous month to $446.89 billion. Sales and services are still 1.7% above March 2015. A drop in auto sales impacted the latest figures. Retail sales excluding auto and gas sales actually rose 0.1% for the month. Total sales for the first quarter of 2016 were up 2.8% from the same period a year ago.
  • On the heels of curtailed consumer spending, producer prices also dropped as the Producer Price Index fell 0.1% in March following a 0.2% decline in February. Reversing trends, prices for services, which had risen each month since October, fell 0.2% in March, while prices for goods, which had declined each of the previous eight months, actually rose 0.2% in March. Three-quarters of the March decrease in prices for services can be attributed to margins for machinery, equipment, parts, and supplies wholesaling, which moved down 1.9%. Most of the increase in prices for goods can be traced to prices for energy, which rose 1.8%, with the gasoline index climbing 7.1%.
  • The Bureau of Labor Statistics last week reported that the U.S. import price index increased 0.2% in March following a 0.4% drop the prior month. An upturn in fuel and lubricant prices, which increased 4.9% in March, sparked the overall price increase as it more than offset lower nonfuel prices. Specifically, petroleum and petroleum product prices actually increased 6.5% from February. Prices for U.S. exports recorded no change in March, after falling 0.5% in February. The March advance was the largest one-month increase since the index increased 1.1% in May 2015. Despite the upturn, overall import prices remained down over the past year, falling 6.2% from March 2015.
  • The government deficit is expanding during the first six months of fiscal 2016, following several years of contraction. Since reaching its high point of $1.4 billion during the recession of 2009, the deficit has fallen, going from 9.8% of the GDP to around 2.5%. However, for fiscal 2016 (beginning October 2015), the deficit sat at about $461.04 billion–up almost 4.9% from the first half of fiscal 2015. In March, the deficit was $108.04 billion, $55.13 billion over the deficit from March 2015. Spending on Social Security and Medicare was up 3% and 6%, respectively. While the government is collecting more taxes from individuals, corporate tax receipts are down, possibly reflecting receding corporate profits.
  • The dollar amount of inventories held by manufacturers, wholesalers, and retailers in relation to sales provides an indication of the direction of production activity in the near term. The ratio of inventories to sales for February was 1.41, the same as January. A lower ratio means products are moving and inventories are not being held long term. An increase in inventories to sales could lead to a slowdown in production and job loss. Compared to January, inventories fell from $1,813,781 to $1,812,098, while sales fell even more, from $1,289,496 in January to $1,284,417 in February. The inventories to sales ratio for February is up from a year earlier–1.41 to 1.37.
  • Industrial production decreased 0.6% in March for a second month in a row. For the first quarter as a whole, industrial production fell at an annual rate of 2.2%. At 103.4% of its 2012 average, total industrial production in March was 2.0% below its year-earlier level. Manufacturing output fell 0.3% for the month–significantly impacted by a 1.6% decline in vehicle production. The output of consumer goods decreased 0.4% following a 0.8% drop in February.
  • The Index of Consumer Sentiment declined in early April, according to the latest report from the University of Michigan. At 89.7, the index fell for the fourth consecutive month. According to the report, “Consumers reported a slowdown in expected wage gains, weakening inflation-adjusted income expectations, and growing concerns that slowing economic growth would reduce the pace of job creation.”
  • For the week ended April 9, there were 253,000 claims for unemployment insurance, a decrease of 13,000 from the previous week’s revised level. This marks 58 consecutive weeks of initial claims below 300,000, the longest streak since 1973. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for continuing unemployment insurance claims for the week ended April 2 was 2,171,000, a decrease of 18,000 from the prior week’s revised level.

Eye on the Week Ahead

The housing sector of the economy, which had been strong, recently has shown signs of slowing down. This week’s reports on new construction and existing home sales for March may shed some light on the direction of the housing market entering the spring–a historically favorable season for home sales. Globally, several major oil producers are scheduled to meet this week to consider limiting production.