What I’m Watching This Week – 6 June 2016

The Markets (as of market close June 3, 2016)

Friday’s dismal news on the labor front put a damper on expectations that the Fed will raise rates later this month, drove a pullback in domestic stocks, and sent Treasury yields into decline. Yet despite the day’s market dips, most indexes ended the week either flat or in the green.

In international news, the Organization of the Petroleum Exporting Countries concluded its highly anticipated meeting last Thursday without agreement on production caps. The European Central Bank (ECB) held rates steady, while raising the outlook for inflation by 0.1% and growth by 0.2%. ECB President Mario Draghi noted current stimulus measures appear to be working.

Crude oil (WTI) closed at $48.90 a barrel last week, down $0.66 over the previous week. The price of gold (COMEX) rose to $1,246.50 by late Friday afternoon, up from the prior week’s price of $1,215.30. The national average retail regular gasoline price increased to $2.339 per gallon on May 30, 2016, $0.039 above the prior week’s price but $0.441 below a year ago.

Market/Index 2015 Close Prior Week As of 6/3 Weekly Change YTD Change
DJIA 17425.03 17873.22 17807.06 -0.37% 2.19%
Nasdaq 5007.41 4933.50 4942.52 0.18% -1.30%
S&P 500 2043.94 2099.06 2099.13 0.00% 2.70%
Russell 2000 1135.89 1150.45 1164.13 1.19% 2.49%
Global Dow 2336.45 2344.41 2349.87 0.23% 0.57%
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% 1.85% 1.71% -14 bps -55 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

  • The United States saw just 38,000 new nonfarm payroll positions added in May, according to the Bureau of Labor Statistics. And while the unemployment rate fell 0.3 percentage point to 4.7%, it was not good news, as nearly half a million job seekers stopped looking for work. Employment increased in health care, mining continued to lose jobs, and employment in information decreased due to the Verizon strike. In addition, the number of persons employed part-time for economic reasons (also referred to as involuntary part-time workers) increased by 468,000 to 6.4 million in May. Average hourly earnings increased by $0.05 in May to $25.59. Earnings have risen an average of 2.5% over the past year.
  • Personal consumption expenditures (PCE)–or “consumer spending”–rose by 1% in April, the largest monthly gain in nearly seven years, according to the Bureau of Economic Analysis. PCE, which represents more than two-thirds of overall economic growth in the United States, increased $119.2 billion for the month. By comparison, PCE rose by just 0.2% in February and remained flat in March. Personal income increased $69.8 billion, or 0.4%, and disposable personal income (DPI) increased $63.5 billion, or 0.5%, in April.
  • The Conference Board Consumer Confidence Index®, which had decreased in April, declined further in May. The index now stands at 92.6, down from 94.7 in April. The Present Situation Index decreased from 117.1 to 112.9, while the Expectations Index declined from 79.7 to 79.0 in May. The percentage of consumers stating business conditions are “good” improved from 24.2% to 25.9%. However, those saying business conditions are “bad” also increased, from 18.2% to 21.6%.
  • The S&P/Case-Shiller U.S. National Home Price Index rose 5.2% on an annual basis in March, down from 5.3% in February. The 10-City Composite and 20-City Composite Indexes remained unchanged from the prior month, at 4.7% and 5.4%, respectively. “Home prices are continuing to rise at a 5% annual rate,” said David M. Blitzer, Managing Director & Chairman of the Index Committee at S&P Dow Jones Indices. “The economy is supporting the price increases with improving labor markets, falling unemployment rates, and extremely low mortgage rates.”
  • The Institute for Supply Management Manufacturing Index grew for the third consecutive month, registering 51.3% for May, an increase of half a percentage point over April. The New Orders Index came in at 55.7%, down slightly from the April reading of 55.8%. The Production Index fell 1.6 percentage points to 52.6%, while the Employment Index held steady at 49.2%. Readings over 50 indicate growth, while readings less than 50 point to slowdowns.
  • On the other hand, the Markit U.S. Manufacturing Purchasing Managers’ Index™ pointed to the weakest manufacturing performance since September 2009. At 50.7 in May, the index fell 0.1 percentage point from April’s reading. Markit Chief Economist Chris Williamson attributed the slowdown to falling export demand and growing uncertainty surrounding the presidential election.
  • The Institute for Supply Management Non-Manufacturing Index was 52.9% in May, 2.8 percentage points lower than the April reading of 55.7%. The Non-Manufacturing Business Activity Index decreased to 55.1%, 3.7 percentage points lower than April; the New Orders Index dropped 5.7 percentage points from the April reading of 59.9%; and the Employment Index decreased 3.3 percentage points to 49.7% from April.
  • The goods and services trade deficit was $37.4 billion in April, up $1.9 billion from $35.5 billion in March, revised, reported the U.S. Census Bureau and the Bureau of Economic Analysis. April exports were $182.8 billion, $2.6 billion more than March, and imports were $220.2 billion, an increase of $4.5 billion over the prior month. Year-to-date, the goods and services deficit decreased $8.1 billion, or 4.8%, from the same period in 2015. Exports and imports both decreased 5.1%, to $39.0 billion and $47.1 billion, respectively.
  • According to the U.S. Census Bureau, new orders for manufactured goods in April, up three of the last four months, increased $8.7 billion, or 1.9%, to $460.5 billion. This was the biggest jump in six months, driven largely by new orders for non-defense aircraft, which jumped by 65%. Shipments increased $2.2 billion, or 0.5%, to $456.8 billion. Unfilled orders increased $6.6 billion, or 0.6%, to $1,137.3 billion. Inventories decreased $0.5 billion, or 0.1%, to $620.8 billion. This followed a 0.1% March decrease.
  • In the week ended May 28, the advance figure for seasonally adjusted initial unemployment insurance claims was 267,000, a decrease of 1,000 from the previous week’s unrevised level of 268,000. The advance seasonally adjusted insured unemployment rate was 1.6% for the week ended May 21, unchanged from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ended May 21 was 2,172,000, an increase of 12,000 from the previous week’s revised level.

Eye on the Week Ahead

Given last week’s unexpectedly disappointing employment numbers, all ears will be listening carefully to Janet Yellen’s remarks on Monday to gauge the future of interest rates. Key data releases include the second estimate on Q1 productivity and labor costs, as well as the April results from the Job Openings and Labor Turnover Survey (JOLTS).