What I’m Watching This Week – 19 June 2017

The Markets (as of market close June 16, 2017)

The benchmark indexes listed here seemed to follow last week’s mixed economic news. While the Fed raised interest rates based on what it perceived as favorable labor and economic reports, inflation is definitely receding and the housing market has stalled. Equities were mixed as the small caps of the Russell 2000 and the tech stocks of the Nasdaq fell back, while the large caps of the S&P 500 and Dow posted marginal gains. Rising interest rates were offset by lower inflationary trends, which may account for the lack of movement in the 10-year Treasuries.

The price of crude oil (WTI) fell again last week, closing at $44.67 per barrel, down from the prior week’s closing price of $45.90 per barrel. The price of gold (COMEX) decreased last week, closing at $1,255.20 by late Friday afternoon, down from the prior week’s price of $1,268.80. The national average retail regular gasoline price decreased to $2.366 per gallon on June 12, 2017, $0.048 lower than the prior week’s price and $0.033 less than a year ago.

Market/Index 2016 Close Prior Week As of 6/16 Weekly Change YTD Change
DJIA 19762.60 21271.97 21384.28 0.53% 8.21%
Nasdaq 5383.12 6207.92 6151.76 -0.90% 14.28%
S&P 500 2238.83 2431.77 2433.15 0.06% 8.68%
Russell 2000 1357.13 1421.71 1406.73 -1.05% 3.65%
Global Dow 2528.21 2782.75 2764.97 -0.64% 9.36%
Fed. Funds target rate 0.50%-0.75% 0.75%-1.00% 1.00%-1.25% 25 bps 50 bps
10-year Treasuries 2.44% 2.16% 2.15% -1 bps -29 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

  • Despite declining inflation that continues to run below the Fed’s 2.0% target rate, the Federal Open Market Committee raised the range for the federal funds rate 0.25% to 1.00%-1.25%. The Committee based its decision on the expectation that the labor market will continue to strengthen, and the fact that economic activity has been rising moderately so far this year. The Committee further noted that the unemployment rate has declined, household spending has picked up in recent months, and business fixed investment has continued to expand. The Fed indicated that “inflation on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilize around the Committee’s 2% objective over the medium term.” In addition, the Fed proposed to slowly cull its long-term asset holdings, consisting primarily of Treasuries and mortgage securities by letting them mature without reinvestment. This action will also likely push up long-term interest rates.
  • In a sign of receding inflationary pressure, consumer prices fell 0.1% in May, according to the latest report from the Bureau of Labor Statistics. A 2.7% decrease in the energy index contributed to the monthly decrease in the CPI. Over the last 12 months, the CPI has risen 1.9%, a smaller increase than the 2.2% gain over the 12 months ended in April. The index for all items less food and energy rose 0.1% in May, as it did in April. The index for all items less food and energy rose 1.7% over the 12 months ended in May. Comparatively, the index for all items less food and energy increased 1.9% over the 12 months ended in April.
  • On the heels of May’s drop in the Consumer Price Index, retail sales (a measure of what consumers are spending at retailers) decreased 0.3% in May from the previous month. This is the largest monthly decrease since January 2016. Sales at department stores fell 1.0%, auto sales declined 0.2%, sales at gasoline stations declined 2.4%, and restaurant sales dipped 0.1%. Since last May, retail sales are up 3.8%, which is below the 4.6% increase in retail sales over the 12 months ended in April. Nonstore (online) retail sales increased 0.8% for the month, and are up 10.2% since May 2016.
  • Producer prices showed no movement in May compared to the prior month, according to the Producer Price Index. For the year, overall producer prices are up 2.4%, while prices less food and energy have increased 2.1%. Production costs may have decreased with energy prices falling 3.0% in May, allowing producers to realize higher margins (profits) without actually increasing prices for goods and services.
  • Eight months into the government’s fiscal year, the budget deficit sits at $432.9 billion, which is 6.8% higher than the deficit for the same period last fiscal year. While government receipts are up 1.4% from a year ago, spending is 2.3% higher. For the 2017 fiscal year, the government has spent $390 billion on defense, $623 billion on Social Security, and $368 billion on Medicare.
  • Prices for imports and exports fell in May, according to the latest report from the Bureau of Labor Statistics. Import prices declined 0.3% in May after increasing 0.2% in April. Lower fuel prices drove the decrease last month. The price index for U.S. imports rose 2.1% for the 12 months ended in May. Export prices declined 0.7% in May following a 0.2% advance in April. The price index for U.S. exports rose 1.4% for the year ended in May.
  • Industrial production was unchanged in May following a noteworthy 1.1% increase in April. Total industrial production in May was 2.2% above its year-earlier level. A negative in the report is in the manufacturing sector, which fell 0.4% in May. This drop was offset by a 1.6% gain in mining and a 0.4% bump in utilities. Capacity utilization for the industrial sector edged down 0.1 percentage point in May to 76.6%, a rate that is 3.3 percentage points below its long-run average.
  • The housing sector has been slowing of late, and May’s housing starts report adds to that trend. Housing starts in May were 5.5% below the revised April estimate and are 2.4% below the May 2016 rate. Building permits were 4.9% off their April rate and are now 0.8% below the rate for May 2016. Housing completions are up 5.6% for the month and 14.6% above the May 2016 rate. Accelerating housing completions coupled with receding starts and permits will likely lead to shrinking inventory and possibly rising prices.
  • In the week ended June 10, the advance figure for seasonally adjusted initial claims for unemployment insurance was 237,000, a decrease of 8,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate remained at 1.4% for the ninth consecutive week. For the week ended June 3, there were 1,935,000 insured unemployed, an increase of 6,000 from the previous week’s level, which was revised up 12,000.

Eye on the Week Ahead

This week focuses on the latest information from the housing sector. Both new home sales and sales of existing homes have fallen recently so it will be interesting to see if sales picked up the pace in May.

What I’m Watching This Week – 12 June 2017

The Markets (as of market close June 9, 2017)

The benchmark indexes listed here produced mixed results last week. The large-cap Dow gained a little more than 0.25%, while the small-cap Russell 2000 jumped over 1.0% by last week’s end. On the other hand, tech stocks took a hit as the Nasdaq fell over 1.5%. Long-term bond prices fell last week as evidenced by the 4-basis-point jump in the yield of 10-year Treasuries. It’s hard to tell what impact, if any, the domestic (Comey testimony) and foreign (UK election) political developments may have had on the market.

The price of crude oil (WTI) fell back last week, closing at $45.90 per barrel, down from the prior week’s closing price of $47.74 per barrel. The price of gold (COMEX) decreased last week, closing at $1,268.80 by late Friday afternoon, down from the prior week’s price of $1,281.50. The national average retail regular gasoline price increased to $2.414 per gallon on June 5, 2017, $0.008 higher than the prior week’s price and $0.033 more than a year ago.

Market/Index 2016 Close Prior Week As of 6/9 Weekly Change YTD Change
DJIA 19762.60 21206.29 21271.97 0.31% 7.64%
Nasdaq 5383.12 6305.80 6207.92 -1.55% 15.32%
S&P 500 2238.83 2439.07 2431.77 -0.30% 8.62%
Russell 2000 1357.13 1405.39 1421.71 1.16% 4.76%
Global Dow 2528.21 2790.26 2782.75 -0.27% 10.07%
Fed. Funds target rate 0.50%-0.75% 0.75%-1.00% 0.75%-1.00% 0 bps 25 bps
10-year Treasuries 2.44% 2.16% 2.20% 4 bps -24 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

  • Activity has slowed in the non-manufacturing sector in May, according to the Institute for Supply Management. The Non-Manufacturing Index registered 56.9%, which is 0.6 percentage point lower than the April reading of 57.5%. The non-manufacturing sector, which includes such industries as real estate, accommodations, food, arts and entertainment, and health care, grew for the 89th consecutive month (a reading of 50% or higher indicates growth), but at a slower pace than the prior month. According to the Non-Manufacturing ISM® Report On Business®, new orders, business activity, and prices all showed a slower rate of growth compared to April. Only employment grew at a faster pace.
  • According to the Job Openings and Labor Turnover (JOLTS) report, there were 6.0 million job openings in April. Job openings increased in a number of industries, with the largest increase occurring in accommodation and food services (+118,000). Job openings decreased in durable goods manufacturing (-30,000). The number of job openings increased in the Midwest and Northeast regions. The number of job hires decreased by 253,000 to 5.1 million. Hires decreased in health care and social assistance (-68,000) and real estate and rental and leasing (-23,000). The number of hires decreased in the West region. Total separations (turnover) edged down 225,000 to 5.0 million in April. Total separations increased in state and local government education (+17,000) but decreased in retail trade (-100,000). Over the 12 months ended in April, hires totaled 62.9 million and separations totaled 60.7 million, yielding a net employment gain of 2.2 million.
  • Following last week’s election, the UK’s ruling Conservative Party lost its parliamentary majority. How this development will impact the Brexit remains to be seen, but indications are that negotiations will push ahead even though the political strength of Prime Minister May has been weakened.
  • In the week ended June 3, the advance figure for seasonally adjusted initial claims for unemployment insurance was 245,000, a decrease of 10,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.4% for the eighth consecutive week. For the week ended May 27, there were 1,917,000 receiving unemployment benefits, a decrease of 2,000 from the previous week’s level, which was revised up 4,000.

Eye on the Week Ahead

The big news this week surrounds the FOMC meeting and whether interest rates will be increased. The Committee held off on an interest rate hike in May and appeared primed to jack up rates in June. However, major economic indicators, such as consumer prices, consumer spending, the GDP, and the employment sector, have not been especially strong, leading to speculation that at least some members of the Committee may be inclined to hold rates as is until steadier economic progress is evident.

 

What I’m Watching This Week – 5 June 2017

The Markets (as of market close June 2, 2017)

New highs were reached by the S&P 500, the Dow, and Nasdaq as stocks rose for the second week in a row. The small-cap Russell 2000, which had been lagging, scored the highest weekly gains, closing up 1.67%. While the lackluster jobs report apparently didn’t have much of an impact on equities, it may be the reason long-term bond prices climbed as the yield on 10-year Treasuries fell to their lowest level since November of last year.

The price of crude oil (WTI) fell back last week, closing at $47.74 per barrel, down from the prior week’s closing price of $49.79 per barrel. The price of gold (COMEX) increased, closing at $1,281.50 by late Friday afternoon, up from the prior week’s price of $1,270.10. The national average retail regular gasoline price increased to $2.406 per gallon on May 29, 2017, $0.007 higher than the prior week’s price and $0.067 more than a year ago.

Market/Index
2016 Close
Prior Week
As of 6/2
Weekly Change
YTD Change
DJIA
19762.60
21080.28
21206.29
0.60%
7.31%
Nasdaq
5383.12
6210.19
6305.80
1.54%
17.14%
S&P 500
2238.83
2415.82
2439.07
0.96%
8.94%
Russell 2000
1357.13
1382.24
1405.39
1.67%
3.56%
Global Dow
2528.21
2769.02
2790.26
0.77%
10.37%
Fed. Funds target rate
0.50%-0.75%
0.75%-1.00%
0.75%-1.00%
-0 bps
25 bps
10-year Treasuries
2.44%
2.24%
2.16%
-8 bps
-28 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 employment sector has been volatile the past few months. While March’s hirings were weak, April proved positive for job gains. However, employment in May has slowed again. There were 138,000 new jobs added for the month, compared to 174,000 new hires in April, which was revised down from 211,000. The unemployment rate dropped 0.1 percentage point to 4.3% — a 16-year low. The number of unemployed persons decreased from 7.1 million in April to 6.9 million in May. Since January, the unemployment rate has declined by 0.5 percentage point and the number of unemployed has decreased by 774,000. The labor force participation rate declined by 0.2 percentage point to 62.7% in May but has shown no clear trend over the past 12 months. In May, average hourly earnings for all employees on private nonfarm payrolls rose by $0.04 to $26.22. Over the year, average hourly earnings have risen by $0.63, or 2.5%. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in May.
  • Personal income and consumer spending increased in April, according to the latest report from the Bureau of Economic Analysis. Personal income increased $58.4 billion, or 0.4%, for the month while disposable personal (after-tax) income increased $56.5 billion, or 0.4%. Personal consumption expenditures also climbed 0.4% to $53.2 billion in April following a 0.3% gain in March, revised. Core PCE (excluding food and energy) rose 0.2% after falling 0.1% in March. For the 12 months ended in April, the PCE price index is up 1.7%.
  • The final report on the goods and services trade deficit for April was released last week by the Census Bureau. The deficit increased by $2.3 billion from $45.3 billion in March to $47.6 billion in April. April exports were $191.0 billion, $0.5 billion less than March exports. April imports were $238.6 billion, $1.9 billion more than March imports. Year-to-date, the goods and services deficit increased $22.1 billion, or 13.4%, from the same period in 2016. Overall, this information highlights the increased U.S. demand for foreign goods and services, while the foreign demand for U.S. products has declined.
  • According to the IHS Markit U.S. Manufacturing PMI™ for May, manufacturing continues to lose momentum since the beginning of the year. The purchasing managers’ index dropped to 52.7 in May, down from April’s 52.8. While the decrease is marginal, it is a clear indication that purchasing managers are seeing weaker business growth and job creation. While readings over 50 indicate growth, the last couple of months have signaled the weakest improvement in business conditions since last September.
  • The May 2017 Manufacturing ISM® Report On Business® also produces a purchasing managers’ index. The PMI® for May was 54.9%, 0.1 percentage point higher than April’s reading. According to the report, the New Orders Index registered 59.5%, an increase of 2.0 percentage points over April, but the Production Index fell 1.5 percentage points to 57.1% compared to April’s 58.6%. Responding managers felt employment and inventories were better in May, while prices were off by 8.0 percentage points.
  • Consumer confidence, which fell in April, declined further in May, according to The Conference Board Consumer Confidence Index®. The index came in at 117.9, down from 119.4 in April. The Present Situation Index increased slightly to 140.7 in May from 140.3 in April. The Expectations Index declined from 105.4 in April to 102.6 in May.
  • In the week ended May 27, the advance figure for seasonally adjusted initial claims for unemployment was 248,000, an increase of 13,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.4% for the seventh consecutive week. For the week ended May 20, there were 1,915,000 receiving unemployment benefits, a decrease of 9,000 from the previous week’s revised level. The largest increases in initial claims for the week ended May 20 were in Michigan (+1,634), Missouri (+874), Texas (+652), Vermont (+475), and Mississippi (+459), while the largest decreases were in New York (-1,033), Connecticut (-779), Oregon (-496), Georgia (-440), and New Jersey (-400).

Eye on the Week Ahead

While this week is very light for economic news at home, the focus of attention will be on Great Britain’s national election at the end of the week. A win for the country’s Conservative Party would seem to cement the UK’s exit from the European Union.

Monthly Market Review – May 2017

The Markets (as of market close May 31, 2017)

May provided a bumpy ride for investors. However, by the end of the month, each of the indexes listed here posted monthly gains with the exception of the Russell 2000, which lost over 2.0%. Technology shares continued to climb as the Nasdaq climbed 2.50% in May over April and has risen over 15% since the start of the year. Despite terrorist attacks, mundane oil prices, a rocky first quarter in Washington, and a slowdown in economic growth, U.S. stocks closed the month in positive territory, spurred by generally favorable quarterly corporate earnings reports. May saw the Dow and S&P 500 post monthly gains for the second consecutive month, while the Nasdaq increased in value for the seventh month in a row. Long-term bond prices rose in May over April, evidenced by the falling yield on 10-year Treasuries.

By the close of trading on May 31, the price of crude oil (WTI) was $48.63 per barrel, down from the April 28 price of $49.19 per barrel. The national average retail regular gasoline price was $2.406 per gallon on the last day of May, down from the May 1 selling price of $2.411 but $0.138 more than a year ago. The price of gold increased by the end of May, closing at $1,271.40 on the last trading day of the month, up from its April 28 price of $1,269.50.

Market/Index 2016 Close Prior Month As of May 31 Month Change YTD Change
DJIA 19762.60 20940.51 21008.65 0.33% 6.31%
NASDAQ 5383.12 6047.61 6198.52 2.50% 15.15%
S&P 500 2238.83 2384.20 2411.80 1.16% 7.73%
Russell 2000 1357.13 1400.43 1370.21 -2.16% 0.96%
Global Dow 2528.21 2731.15 2758.92 1.02% 9.13%
Fed. Funds 0.50%-0.75% 0.75%-1.00% 0.75%-1.00% 0 bps 25 bps
10-year Treasuries 2.44% 2.28% 2.20% -8 bps -24 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 Month’s Economic News

  • Employment: The employment sector picked up the pace in April following a weak March. There were 211,000 new hires in April in contrast to March’s revised total of only 79,000. For April, employment growth occurred in leisure and hospitality (+55,000), food services and drinking places (+26,000), health care and social assistance (+37,000), and professional and business services (+39,000). The unemployment rate dipped to 4.4% — the lowest rate since May 2001. Over the year, the unemployment rate has declined by 0.6 percentage point, and the number of unemployed has fallen by 854,000. There were 7.056 million unemployed persons in April (7.202 million in March). The labor participation rate remained at 62.9%. The average workweek was 34.4 hours in April. Average hourly earnings increased by $0.07 to $26.19, following a $0.05 increase in March. Over the last 12 months ended in April, average hourly earnings have risen by $0.65, or 2.5%.
  • FOMC/interest rates: The Federal Open Market Committee conceded that consumer spending may have slowed in the first quarter, prompting the Committee to leave interest rates unchanged at 0.75%-1.00%. However, labor has remained strong, nearing full employment, while a dip in consumer spending and consumer prices was deemed transitory by the Committee. Continued strength in employment and increases in consumer spending and inflation next month may prompt the FOMC to consider a rate increase when it next meets in June.
  • GDP/Budget: Expansion of the U.S. economy slowed over the first three months of 2017. According to the Bureau of Economic Analysis, the first-quarter 2017 gross domestic product grew at an annualized rate of 1.2%. The fourth-quarter 2016 GDP grew at an annual rate of 2.1%. The first-quarter GDP reflected positive contributions from nonresidential fixed investment, exports, residential fixed investment, and personal consumption expenditures that were partly offset by negative contributions from private inventory investment, federal government spending, and state and local government spending. Imports, which are a subtraction in the calculation of the GDP, increased. An indicator of inflationary trends, the price index for gross domestic purchases increased 2.6% in the first quarter, compared to an increase of 2.0% in the fourth quarter. As to the government’s budget, the federal deficit through the first eight months of fiscal 2017 was $344 billion — $8 billion less than the deficit over the same period last year. For the month of April, the government realized a budget surplus of $182.4 billion, which is $76 billion more than the April 2016 surplus.
  • Inflation/consumer spending: Inflation, as measured by personal consumption expenditures, picked up in April. For the 12 months ended in April 2017, the personal consumption expenditures price index expanded at a rate of 1.7%. For April, personal income increased 0.4% over March. Disposable personal (after-tax) income increased 0.4%. Personal consumption expenditures (the value of goods and services purchased by consumers) also increased 0.4% for the month. The prices companies receive for goods and services showed improvement in April from March, as the Producer Price Index increased 0.5% in April following a 0.1% dip the prior month. Year-over-year, producer prices have increased 2.5%. In April, energy prices climbed 0.8% while food prices increased 0.9%. The PPI less food and energy increased 0.4% for the month and has risen 1.9% over the last 12 months. Consumer prices, which retreated in March, increased 0.2% in April. For the year, consumer prices are up 2.2%. Core prices, which exclude volatile food and energy, increased 0.1% for the month and have climbed 1.9% since April 2016.
  • Housing: The housing sector, which had shown strength over the first three months of 2017, slowed considerably in April. Existing home sales plunged 2.3% to a seasonally adjusted annual rate of 5.570 million, down from March’s revised annual rate of 5.700 million. Existing home sales are only 1.6% ahead of the sales pace from a year ago. The median sales price for existing homes rose to $244,800 from the March price of $236,400. Total housing inventory at the end of April climbed 7.2% to 1.93 million existing homes available for sale (9.0% lower than a year ago). Sales of newly constructed homes also dropped in April, according to the Census Bureau. Sales of new single-family homes fell 11.4% in April to an annual rate of 569,000 — down from March’s revised rate of 642,000. The median sales price of new houses sold in April was $309,200 ($318,700 in March), while the average sales price was $368,300 ($388,200 in March). The seasonally adjusted estimate of new houses for sale at the end of April was 268,000. This represents a supply of 5.7 months at the current sales rate.
  • Manufacturing: According to the Federal Reserve, industrial production ticked up 1.0% in April. Manufacturing output increased 1.0% following a 0.4% decline in March. Manufacturing gains were led by production of motor vehicles, business equipment, and consumer goods. The indexes for mining and utilities posted gains of 1.2% and 0.7%, respectively. Total industrial production for April was 2.2% above its year-earlier level. Capacity utilization increased 0.6 percentage point to 76.7%, which is 3.2 percentage points below its long-run average. As for durable goods, the Census Bureau report reveals that new orders dropped 0.7% in April following a 2.3% revised increase in March. Excluding the volatile transportation segment, new durable goods orders fell 0.4%. Orders for core capital goods (excluding defense and transportation) had no change from March, but are up 2.9% over the past 12 months.
  • Imports and exports: The advance report on international trade in goods revealed that the trade gap grew by $2.5 billion in April. The overall trade deficit was $67.6 billion, up from March’s deficit of $65.1 billion. Exports declined 0.9% to $125.9 billion. Imports increased by 0.7% to $193.4 billion in April. The prices for U.S. imports of goods showed strength in April following a weak March. Import prices jumped 0.5% for the month, led by a 1.6% increase in petroleum prices. U.S. export prices rose 0.2% after advancing a revised 0.1% in March. Export prices haven’t recorded a monthly decline since the index fell 0.8% in August 2016.
  • International markets: The election of Emmanuel Macron as France’s president was greeted favorably by eurozone investors early in May. Despite the tragic terrorist attack in Manchester, England, investors maintained a “steady-as-she-goes” approach with moderate trading throughout the month. OPEC and Russia agreed to extend the cut in oil output. However, oil prices haven’t climbed appreciably as investors apparently were hoping for deeper cuts than those announced. Moody’s Investors Service cut China’s sovereign credit rating for the first time since 1989 on the premise that the country’s financial strength is expected to weaken as debt continues to rise and the economy slows.
  • Consumer sentiment: Consumer confidence is holding steady in May. The Conference Board Consumer Confidence Index® for May fell slightly to 117.9 from April’s 119.4. While consumers continued to express optimism about both the current state of the economy and its future, their enthusiasm has waned some from earlier in the year. The Surveys of Consumers of the University of Michigan Index of Consumer Sentiment also dropped marginally to 97.1 in May from 97.6 in April.

Eye on the Month Ahead

Economic signs were mixed last month, so it isn’t certain that the FOMC will raise interest rates when it meets in June. The final GDP figures for the first quarter are out in June. Consumer spending has been relatively weak through much of the first part of 2017, causing inflation to slow a bit.