What I’m Watching This Week – 23 May 2016

The Markets (as of market close May 20, 2016)

The Dow slipped for the fourth week in a row as investors may have been influenced by the uncertainty surrounding whether the Fed will raise interest rates at its next meeting in June. The S&P 500 rebounded slightly, posting a marginal gain for the first time in four weeks. The Nasdaq returned the week’s best results, while gaining ground on its year-end closing value.

Crude oil (WTI) closed at $47.67 a barrel last week, up $1.30 over the prior week’s closing price. The price of gold (COMEX) fell by last week’s end, selling at $1,252.90 by late Friday afternoon, down from the prior week’s closing price of $1,274.30. The national average retail regular gasoline price increased to $2.242 per gallon on May 16, 2016, $0.022 above the prior week’s price but $0.502 below a year ago.

Market/Index 2015 Close Prior Week As of 5/20 Weekly Change YTD Change
DJIA 17425.03 17535.32 17500.94 -0.20% 0.44%
Nasdaq 5007.41 4717.68 4769.56 1.10% -4.75%
S&P 500 2043.94 2046.61 2052.32 0.28% 0.41%
Russell 2000 1135.89 1102.44 1112.28 0.89% -2.08%
Global Dow 2336.45 2293.75 2287.28 -0.28% -2.10%
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% 1.70% 1.84% 14 bps -42 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

  • Surging oil prices and a slightly weakening dollar may be firming inflationary trends as the all items Consumer Price Index increased 0.4% in April, according to the Bureau of Labor Statistics. Over the last 12 months, the all items index rose 1.1%. The gain in the all items index reflects several sub-index increases, including the food index (0.2%), the shelter index (0.3%), the energy index (3.4%), and the gasoline index (8.1%). An index used as a gauge for overall inflation, the index for all items less food and energy (the core index) increased 0.2% in April. Over the last 12 months, the core index is up 2.1% compared to a 2.2% rise for the 12 months ended March.
  • The National Association of Home Builders Housing Market Index for May remained at 58 for the fourth consecutive month. The index for current single family sales remained at 63–the same as April–while the index for single family sales over the next six months increased in May to 65 from April’s reading of 62. According to NAHB Chief Economist Robert Dietz, “The fact that future sales expectations rose slightly this month shows that builders are confident that the market will continue to strengthen. Job creation, low mortgage interest rates, and pent-up demand will also spur growth in the single-family housing sector moving forward.”
  • The sale of existing homes increased for the second consecutive month, despite an inventory shortage and increasing price momentum. Total existing home sales rose 1.7% in April at an annual rate of 5.45 million from 5.36 million in March. Sales are up 6.0% from April 2015. Total housing inventory at the end of April increased 9.2% to 2.14 million existing homes available for sale, but is still 3.6% lower than a year ago (2.22 million).The median existing-home price for all housing types in April was $232,500, up 6.3% from April 2015 ($218,700). April’s price increase marks the 50th consecutive month of year-over-year gains.
  • The number of building permits issued (3.6%) and housing starts (6.6%) increased in April compared to March, while the number of housing completions fell 11.0%. While these figures could be revised as further information is obtained, this report reflects positive expansion in the private housing sector following a slowdown in the first quarter of the year.
  • The Federal Reserve reported that industrial production increased 0.7% in April after falling the previous two months. Manufacturing output rose 0.3% after declining the same amount in March. The index for utilities jumped 5.8% in April, as the demand for electricity and natural gas returned to a more normal level after being suppressed by warmer-than-usual weather in March. At 104.1% of its 2012 average, total industrial production in April was 1.1% below its year-earlier level. Also, capacity utilization for the industrial sector increased 0.5 percentage point in April to 75.4%, a rate that is 4.6 percentage points below its long-run (1972-2015) average.
  • The minutes from the April FOMC meeting, released last week, revealed that an interest rate increase in June is a distinct possibility if economic conditions continued to improve into the second quarter. Raising the federal funds rate can have conflicting implications. On the one hand, raising rates is indicative of the Fed’s opinion that the economy is improving. Conversely, higher rates can have the effect of increasing the cost of investing in stocks, which could negatively impact the markets.
  • For the week ended May 14, there were 278,000 claims for unemployment insurance, a decrease of 16,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate remained at 1.6% from the prior week’s unrevised level. The advance number for continuing unemployment insurance claims for the week ended May 7 was 2,152,000, a decrease of 13,000 from the previous week’s revised level.

Eye on the Week Ahead

Following last week’s reports on housing starts and existing home sales, this week provides the latest information on new home sales. The second estimate on the first-quarter GDP closes the week.