Author: dredheadz

The Markets (as of market close June 17, 2016)

The Fed maintained interest rates at their current level following last week’s meeting, primarily influenced by May’s mundane employment report. That, coupled with a fall in global stocks, pushed U.S. stocks down as money seemed to move to gold and long-term bonds. Each of the indexes listed here lost value compared to the prior week. The Dow dropped 190 points and 1.06%. Since June 8, the S&P 500 is down 3.7% after falling 1.19% last week. The tech-heavy Nasdaq lost almost 2.0%, while the Russell 2000 dropped over 1.50%. Gold soared in price, crude oil remains below $50 a barrel after exceeding that mark a few weeks ago, and the yield on long-term Treasuries is down 65 basis points since the beginning of the year.

Crude oil (WTI) closed at $48.26 a barrel last week, down $0.68 from the previous week. The price of gold (COMEX) rose to $1,301.60 by late Friday afternoon, up from the prior week’s price of $1,276.30. The national average retail regular gasoline price increased for the fifth week in a row to $2.399 per gallon on June 13, 2016, $0.018 above the prior week’s price but $0.436 below a year ago.

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 Federal Open Market Committee held interest rates at their current range of 0.25%-0.50% following its meeting last week. The Committee noted that, while growth in economic activity has picked up and household spending has strengthened, the pace of improvement in the labor market slowed, job gains diminished, and inflation continues to run below the Committee’s 2.0% longer-run objective. Essentially reiterating a common theme of late, Chair Janet Yellen stated, “We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate. We expect the rate to remain, for some time, below levels that are anticipated to prevail in the longer run because headwinds weighing on the economy mean that the interest rate needed to keep the economy operating near its potential is low by historical standards.” It would appear that June’s employment report will have a significant bearing on whether the Committee increases interest rates in July.
• According to the latest report from the Census Bureau, consumers are spending more as retail and food services sales increased in May over April. Total retail sales and services came in at $455.6 billion in May, 0.5% over April and 2.5% ahead of May 2015. Retail trade sales were up 0.4% from April, and are up 2.0% from last year. Nonstore (online) retail sales were up 12.2% from May 2015, while health and personal care stores increased 8.3% from last year.
• Increasing energy costs are pushing the prices manufacturers receive for goods and services higher. The Producer Price Index rose 0.4% in May following a 0.2% gain in April. In May, over 60% of the index gain can be traced to prices for goods, which climbed 0.7%. Prices for services moved up 0.2%. Prices less foods, energy, and trade services edged down 0.1% in May after rising 0.3% in April. For the 12 months ended in May, the price index less foods, energy, and trade services increased 0.8%.
• Despite gains in consumer spending, the prices consumers are paying haven’t moved much. The Consumer Price Index for May showed prices increased a scant 0.2% over April (0.4% increase), while the core prices, excluding food and energy, also inched up 0.2%. Food prices fell 0.2% while energy prices increased 1.2%, reflective of a rise of 2.3% in gasoline prices. Over the last 12 months, the all items index rose 1.0%, while the index for all items less food and energy rose 2.2%.
• The Federal Reserve’s Index of Industrial Production, which includes factories, mines, and utilities, fell 0.4% in May after increasing 0.6% in April. Manufacturing output moved down 0.4%, led by a large step-down in the production of motor vehicles and parts (-4.2%). Factory output, aside from motor vehicles and parts, edged down 0.1%. The index for utilities fell 1.0% as a drop in the output of electric utilities was partly offset by a gain in natural gas utilities. After eight straight monthly declines, the production at mines moved up 0.2%.
• Driven by rising oil prices and a weakening dollar, both import and export prices increased in May over April. Prices for U.S. imports increased 1.4% following advances of 0.7% in April and 0.4% in March. U.S. export prices advanced 1.1% in May after rising 0.5% the previous month.
• Home-builder sentiment improved in June as the National Association of Home Builders Housing Market Index rose to 60 after four straight months at 58. Builders expressed renewed confidence in the market for newly constructed single-family homes in June. According to the NAHB report, builders are seeing more traffic and committed buyers. Breaking down index components, the future sales index gained 5 points to 70, future sales increased 3 points, and present sales jumped 1 point to 64.
• Low mortgage rates and steady job growth have spurred activity in the housing market. However, a lack of inventory and rising prices have kept some would-be homebuyers away. Evidence of this can be seen in the housing starts (the beginning of construction) report for May, which saw privately owned housing starts fall 0.3% to an annual rate of 1,164,000. Single-family housing starts were at an annual rate of 764,000, which is 0.3% above the revised April figure of 762,000. Building permits for private homes increased 0.7% in May, but are off 10.1% compared to May 2015. Builders are apparently trying to keep up with demand as privately owned housing completions in May were 5.1% above the revised April estimate of 940,000.
• In the week ended June 11, the advance figure for seasonally adjusted initial unemployment insurance claims was 277,000, an increase of 13,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate increased 0.1 percentage point to 1.6% for the week ended June 4. The advance number for seasonally adjusted insured unemployment during the week ended June 4 was 2,157,000, an increase of 45,000 from the previous week’s revised level.

Eye on the Week Ahead

The housing market is back in focus this week as May’s figures on existing home sales and new home sales are released. In April, new home sales hit their highest rate since January 2008, while sales of existing homes increased by almost 2% from March. May’s figures are expected to continue to show progress, yet they may not approach the robust growth made in April. Internationally, June 23 marks the date Britons vote on the referendum to determine whether their country remains in the European Union or “Brexits.”

The Markets (as of market close June 10, 2016)

The major market indexes listed here were relatively flat for the week. Despite gains earlier in the week, losses Thursday and Friday wiped out most of the positive returns. By midweek, the S&P 500 reached its highest level since last July only to give back most of the gains, closing the week slightly behind its prior week’s closing value. Technologies underperformed with Nasdaq falling almost 1%. Oil reached $51 per barrel by the middle of the week, but fell back to below that benchmark by week’s end.

Crude oil (WTI) closed at $48.88 a barrel last week, down $0.02 from the previous week. The price of gold (COMEX) rose to $1,276.30 by late Friday afternoon, up from the prior week’s price of $1,246.50. The national average retail regular gasoline price increased for the fourth week in a row to $2.381 per gallon on June 6, 2016, $0.042 above the prior week’s price but $0.399 below a year ago.

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

• Speaking to the World Affairs Council of Philadelphia, FOMC Chair Janet Yellen emphasized that the economy is moving in the right direction. According to Yellen, “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labor market improving further and GDP growing moderately. . . . I expect to see inflation moving up to 2% over the next couple of years.” As to the prospect of increasing interest rates, Yellen noted that “further gradual increases in the federal funds rate will probably be appropriate to best promote the FOMC’s goals of maximum employment and price stability,” although she did not go so far as to hint that a rate increase was imminent following the June FOMC meeting.
• Productivity remains weak as the second estimate for the first quarter showed nonfarm business sector labor productivity decreased at a 0.6% annual rate during the first quarter of 2016, the U.S. Bureau of Labor Statistics reported. Output increased only 0.9%, while hours worked increased 1.5%. From the first quarter of 2015 to the first quarter of 2016, productivity increased 0.7%. Unit labor costs in the nonfarm business sector increased 4.5% in the first quarter of 2016, reflecting a 3.9% increase in hourly compensation and a 0.6% decline in productivity. Unit labor costs have increased 3.0% over the last four quarters.
• The U.S. Bureau of Labor Statistics reported the number of job openings was little changed at 5.8 million on the last business day of April. The job openings rate was 3.9%. Job openings increased in a number of industries, with the largest changes occurring in wholesale trade, transportation, warehousing, and utilities. Job openings decreased in professional and business services. The number of hires edged down to 5.1 million in April. The hires rate was 3.5%. There were 5.0 million total separations in April, little changed from March. The total separations rate in April was 3.5%. Total separations, or turnover, includes quits, layoffs and discharges, and other separations.
• The federal deficit expanded by $52.5 billion in May amid rising spending and falling corporate profits. For the first seven months of the fiscal year, the deficit sits at $407.1 billion compared to $366.8 billion for the same period last year.
• Initial survey results for June show consumers are still cautiously optimistic about the economy. The latest report from the University of Michigan’s Surveys of Consumers shows the Index of Consumer Sentiment fell slightly to 94.3 from 94.7 in May. But the Current Economic Conditions Index increased from 109.9 to 111.7. The Index of Consumer Expectations dropped to 83.2 from 84.9 in May. According to the report, consumers rated their current financial situation at the best levels since 2007, but they did not think the economy is as strong as it was last year nor do they anticipate the economy will enjoy the same financial health in the year ahead as they anticipated a year ago.
• In the week ended June 4, the advance figure for seasonally adjusted initial unemployment insurance claims was 264,000, a decrease of 4,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate fell to 1.5% for the week ended May 28, a decrease of 0.1 percentage point from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ended May 28 was 2,095,000, a decrease of 77,000 from the previous week’s unrevised level of 2,172,000.

Eye on the Week Ahead

FOMC Chair Janet Yellen’s remarks last week may prove to be a precursor to the Committee’s actions following this week’s meeting. A poor employment report may be enough to influence members to hold off on raising interest rates, unless retail sales and consumer prices show sufficient inflationary pressure for the Committee to justify a bump in rates.

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.

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).

The Markets (as of market close May 31, 2016)

Following an up-and-down path similar to what occurred in April, the indexes listed here ultimately closed the month of May higher (except for the Global Dow). The month started with a run of positive returns, only to see much of the month’s gains given back by the end of May. Information from the Fed that interest rates could be raised as early as June could be interpreted as both a positive (improving economy) and a negative (higher lending rates), which seemed to flummox investors a bit. Several economic indicators picked up the pace in May as employment remained steady, the housing market gained some momentum heading into the summer months, and consumer prices increased along with mounting oil prices.

Long-term bond yields fluctuated during the month, ultimately closing at essentially the same yield as April’s closing return. The price of gold (COMEX) decreased by month’s end, selling at $1,217.50–about $77 below April’s end-of-month price of $1,294.90.

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.

The Month in Review

• Employment: The labor market cooled a bit following its strong run in March based on the latest information from the Bureau of Labor Statistics. Total nonfarm payroll employment added 160,000 new jobs in April–down 48,000 from the revised 208,000 in March. Employment increased in professional and business services, financial activities, and health care. Job losses occurred in government and mining. The unemployment rate remained unchanged at 5.0%. There were 7.9 million unemployed persons (virtually unchanged from March), while the number of long-term unemployed declined by 150,000 to 2.1 million in April. The labor force participation rate fell slightly to 62.8% from 63.0% in March. The average workweek increased to 34.5 hours from 34.4 hours in March. Average hourly earnings for all employees on private nonfarm payrolls increased by $0.08 to $25.53. Over the year, average hourly earnings have risen by 2.5%.
• FOMC/interest rates:The Federal Open Market Committee did not meet in May as the target range for the federal funds rate remained at 0.25% to 0.50%. However, the minutes from its April meeting seem to indicate that the Committee will not hesitate to raise rates at its next meeting in June if warranted by favorable economic conditions.
• Oil: Crude oil prices continued pushing higher during May, as prices surged to over $50 per barrel, only to fall back to $48.83 per barrel by the close of the month. This is still higher than the April closing price of $45.92 per barrel.
• GDP/budget: The second estimate of the GDP for quarter one revealed only a little better growth at 0.8%, compared to the first estimate of 0.5%. The increase from the first estimate is attributable to positive revisions to residential investment and exports with a decrease in private inventory investment. While this report is better than the first estimate, it is not indicative of significant economic expansion. The year-to-date federal deficit was $355.0 billion in April, more than 25% higher than the deficit over the same period last year, despite a $106.5 billion surplus in April. For the month, the government took in $438.4 billion in receipts and paid out $332.0 billion in expenditures. Compared to March, total receipts in April increased by $210.6 billion, while government expenditures were $3.9 billion lower than March’s total outlays.
• Inflation: The latest inflation rate for the United States based on the Consumer Price Index is 1.1% through the 12 months ended April 2016 as published by the Bureau of Labor Statistics–still below the Fed’s stated target rate of 2.0%. For April, the Consumer Price Index rose 0.4% from March. The index for all items less food and energy (core prices) increased 0.2% in April. Core prices rose 2.1% over the 12 months ended in April, compared to a 2.2% increase for the 12 months ended March. The Producer Price Index, which measures the prices companies receive for goods and services, rose 0.2% in April following a 0.1% decline in March. Prices for services edged up 0.1% for the month, while prices for goods rose 0.2% in April following a similar increase the prior month. Retail sales for goods and services increased 1.3% in April, which is 3.0% above April 2015. Retail trade sales were up 1.4% from March and up 2.7% from last year. Nonstore retailer sales (online sellers) were up 10.2% from April 2015, while gasoline stations were down 9.4% from last year. Personal income increased $69.8 billion, or 0.4%, and disposable personal income (DPI) increased $63.5 billion, or 0.5%, in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $119.2 billion, or 1.0%. In March, personal income increased $56.7 billion, or 0.4%, DPI increased $49.6 billion, or 0.4%, and PCE increased $3.7 billion, or less than 0.1%, based on revised estimates.
• Housing: The housing sector gained momentum in April, influenced by low mortgage rates and solid employment gains. New home sales grew at a pace unseen in the last eight years, jumping 16.6% for the month compared to March. Prompted by increasing demand and limited supplies, the median sales price for new homes increased 9.7% from a year earlier to $321,100. With roughly 243,000 new homes available for sale, the supply is down to 4.7 months compared to 5.5 months in March. Sales of existing homes also increased in April, but not at quite the pace as new home sales. Existing home sales increased 1.7% in April to an annual rate of 5.45 million compared to 5.36 million in March. Existing home sales are up 6.0% from a year ago. The median existing-home price for all housing types in April was $232,500, up 6.3% from April 2015. The 2.14 million existing homes available for sale represents a supply of 4.7 months, a slight increase from the 4.4-month supply in March. Single family home starts increased 6.6% in April as did the number of building permits issued, which increased 3.6% for the month.
• Manufacturing: Manufacturing and industrial production have been relatively weak sectors in the economy for quite some time, although that trend may be changing. According to the Federal Reserve’s report for April, industrial production increased 0.7% following a 0.6% decline in March. However, total industrial production in April was 1.1% below its level from a year earlier. Despite the recent increase in industrial production, manufacturers were not overly enthused as reflected in a couple of purchasing managers’ indexes. The Markit U.S. Manufacturing Purchasing Managers’ Index™ was 50.8 in April, down from 51.5 for March. The Institute for Supply Management PMI for April also came in at 50.8%, falling 1.0 percentage point below its March reading. Durable goods orders increased 3.4% for April, following a 0.8% increase in March. April’s gain in new orders for manufactured goods was led by an 8.9% increase in new orders for transportation equipment. Excluding transportation, durable goods orders were up 0.4% for the month. Year-to-date, new orders for durable goods are up 0.8%.
• Imports and exports: Based on the advance report from the Census Bureau, the international trade in goods deficit grew to $57.5 billion in April versus a revised deficit of $55.6 billion in March. The trade in goods deficit for April is reflective of $119.3 billion of exports and $176.8 billion of imports. Based on advance figures, the trade in goods deficit for the first four months of 2016 sits at $239.0 billion. Rising fuel prices influenced the price index for both imports and exports in April, according to the Bureau of Labor Statistics. Prices for goods manufactured abroad and purchased here (import prices) rose 0.3% for the month following a comparable increase in March. Export prices for goods made here but sold abroad increased 0.5% in April. This is the first monthly increase in export prices since last May.
• International markets: Greece and its creditors were able to reach a new deal that allows the economically embattled country to receive new loans while outlining terms for future debt relief. A U.S. bipartisan congressional bill was introduced that would allow Puerto Rico to restructure its $70 billion debt. The proposed legislation would not involve federal funding, but would allow the island to write down some of its debt. In an attempt to invigorate its sluggish economy, the Japanese prime minister has proposed a significant stimulus package. However, the 1.7% growth in the first quarter of Japan’s GDP may increase resistance to that stimulus proposal.
• Consumer sentiment: The Conference Board Consumer Confidence Index® for May fell to 92.6 from April’s revised 94.7 due to consumers rating current conditions less favorably than in April. On the other hand, the University of Michigan’s Index of Consumer Sentiment increased to 94.7 in May, compared to 89.0 for the prior month. There have been only four prior months since January 2007 in which the Index of Consumer Sentiment was higher than in May 2016.

Eye on the Month Ahead

Looking ahead, June may prove to be a pivotal month for the rest of the year. Will the current economic trends be sufficient to prompt the Fed to raise interest rates in June for the first time this year? Also scheduled for June is the vote over the UK’s membership in the European Union. The European Central Bank meets in June, as does the Organization of the Petroleum Exporting Countries–each event capable of impacting the economy and equities markets of the United States and several foreign nations.

The Markets (as of market close May 27, 2016)

Stocks enjoyed one of their best weeks in months as each of the indexes listed here posted gains last week. Some positive economic data, particularly in the housing sector, along with higher oil prices may have influenced the favorable returns. The Dow and S&P 500 each gained over 2.0%, while the Nasdaq and Russell 2000 ended the week up close to 3.50%. Only the Nasdaq remains behind its end-of-year closing value, although it closed the gap with last week’s performance.

Crude oil (WTI) closed at $49.56 a barrel last week, up $1.89 over the prior week’s closing price. The price of gold (COMEX) fell by last week’s end, selling at $1,215.30 by late Friday afternoon, down from the prior week’s closing price of $1,252.90. The national average retail regular gasoline price increased to $2.300 per gallon on May 23, 2016, $0.058 above the prior week’s price but $0.474 below a year ago.

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

• According to the Bureau of Economic Analysis, the second estimate of the gross domestic product for the first quarter increased at an annual rate of 0.8%. The first estimate for the fourth quarter had the GDP increasing at an annual rate of 0.5%. According to the report, the increase in the second estimate is primarily attributable to an adjustment in private inventory investment, which decreased less than originally estimated. In the fourth quarter, GDP increased 1.4%. The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment, exports, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.
• Speaking on a panel at Harvard University, FOMC Chair Janet Yellen intimated that interest rates may be increased in the coming months. “It’s appropriate, and I’ve said this in the past I think, for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate.”
• Sales of new single family homes rose by 16.6% in April over March–the fastest pace in eight years–according to the Census Bureau. At an annual rate of 619,000, new home sales are 23.8% above the April 2015 estimate of 500,000. The median sales price of new houses sold in April was $321,100; the average sales price was $379,800. The seasonally adjusted estimate of new houses for sale at the end of April was 243,000, which represents a supply of 4.7 months at the current sales rate.
• Further evidence of an improving real estate sector, the National Association of Realtors® reported that pending home sales rose 5.1% in April–their highest level since February 2006. The Pending Home Sales Index reached 116.3 in April following an upwardly revised 110.7 in March, and is 4.6% above April 2015. The index is based on the number of reported contract signings, with closing expected to occur within four to six weeks. According to Lawrence Yun, NAR chief economist, “The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market.”
• New orders for manufactured goods in April were better than expected, as the Census Bureau reported that orders for durable goods increased $7.7 billion, or 3.4%, from the prior month. Shipments of durable goods also increased 0.6% in April following two consecutive months of decreases. Unfilled orders were up 0.6% and new orders for nondefense capital goods (ranging from construction equipment to computers) increased 7.8%. However, excluding aircraft, nondefense capital goods orders actually decreased 0.8% and are down 4.1% over the past four months compared to the same four-month period last year.
• The trade deficit grew by roughly 3.4% in April from March as U.S. imports exceeded exports by $57.5 billion compared to the March balance of $55.6 billion. The Census Bureau’s advance report on international trade in goods showed April’s exports totaled $119.3 billion, with imports coming in at $176.8 billion. However, foreign trade picked up overall as imports increased by 2.3% over March, while exports grew by 1.8%.
• Consumers were more positive in their assessment of the economy in May, according to the latest report from the University of Michigan. The Index of Consumer Sentiment increased from 89.0 in April to 94.7 in May. Both the Current Economic Conditions Index (109.9) and the Index of Consumer Expectations (84.9) increased in May. According to the report, “there have only been four prior months since the January 2007 peak in which the Sentiment Index was higher than in May 2016, all recorded at the start of 2015.”
• For the week ended May 21, there were 268,000 claims for unemployment insurance, a decrease of 10,000 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 14 was 2,163,000, an increase of 10,000 from the previous week’s revised level.

Eye on the Week Ahead

Following the Memorial Day holiday, the week begins with a report on consumer income and spending, which includes the core personal consumption expenditures index–a closely watched indicator of inflationary trends. The week also brings the latest information on the manufacturing sector as revealed through surveys of purchasing managers. The week closes with the important employment situation report for May, which includes information on the unemployment rate, payrolls, and average hourly earnings.

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.

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.

The Markets (as of market close May 13, 2016)

Despite gains earlier in the week, each of the indexes listed here closed last week down from their prior week’s closing values. The Dow and S&P 500 extended their losing streaks to three weeks, with the Dow suffering the largest weekly regression, falling over 205 points. Year-to-date, only the Dow and S&P 500 remain ahead of their 2015 closing values as the tech-heavy Nasdaq, the Russell 2000, and the Global Dow remain behind their respective year-end values.

Crude oil (WTI) jumped last week, closing at $46.37 a barrel, up $1.81 over the prior week’s closing price. The price of gold (COMEX) dropped by last week’s end, selling at $1,274.30 by late Friday afternoon, down from the prior week’s closing price of $1,289.70. The national average retail regular gasoline price decreased to $2.220 per gallon on May 9, 2016, $0.020 below the prior week’s price and $0.471 under a year ago.

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

• Following a slow start in 2016, consumers picked up the retail spending pace in April. The Census Bureau’s advance estimate for retail and food services sales for April were at $453.4 billion, an increase of 1.3% over March, and 3.0% above April 2015. Retail trade sales were up 1.4% from March 2016, and up 2.7% from last year. Nonstore retailers (such as online shopping sites) were up 10.2% from April 2015, while gasoline stations were up 2.2% for the month, although gas stations are down 9.4% from last year. Since about two-thirds of economic output consists of consumer spending, this report is good news on the economic front.
• The prices producers received for goods and services increased 0.2% in April following a 0.1% fall in March. For April, services edged up 0.1% and goods advanced 0.2%. Excluding volatile food and energy, prices for goods and services rose a scant 0.1% for April, and are up 0.9% on the year. Prices are unchanged for 12 months ended in April. As an indicator of inflationary trends, this report does not indicate significant movement toward the Fed’s target rate of 2.0%.
• The latest Treasury budget report for April shows a surplus of $106.5 billion–significantly lower than the April 2015 surplus of $156.7 billion. For the month, total receipts were $438.4 billion–up $210.6 billion over the March total, while outlays were $332.0 billion–$3.9 billion lower than March’s outlays. Not surprisingly, April’s surge in receipts is attributable to the collection of individual income taxes, which are up 1.2% over the first seven months of the fiscal year. Outlays, which are up 4.4%, include increased Medicare payments (+11.3%) and defense spending (+0.4%). The year-to-date deficit is $355.0 billion, which is more than 25% higher than the deficit over the same period last year.
• Higher fuel prices and a weaker dollar kicked up the price indexes for both imports and exports in April, according to the latest report from the Bureau of Labor Statistics. Import prices paid for goods manufactured abroad and purchased here rose 0.3% for the month following a 0.3% increase in March. April’s import price gain marked the largest increase since a 1.1% rise in May 2015. Overall, import prices declined 5.7% over the past year. Export prices paid for goods manufactured here but sold abroad increased 0.5% in April, after recording no change in March. Export prices registered the first monthly advance since a 0.5% increase last May, which also represents the largest 1-month index increase since the 0.9% rise in March 2014. The price index for exports fell 5.0% for the year ended in April, the smallest 12-month decline since the index decreased 5.0% from January 2014 to January 2015.
• Although a bit dated, the most recent Job Openings and Labor Turnover (JOLTS) report from the Bureau of Labor Statistics provides useful information on the number of job openings available on the last business day of the reported month. For March, there were 5.757 million job openings on the last business day of March, up from 5.608 million in February. Hires edged down to 5.3 million, while separations were little changed at 5.0 million. This report provides continued good news on the labor front as job openings increased to 3.9%. Also, workers are staying on the job as the quits rate remained the same at 2.1%, while layoffs fell 0.1 percentage point to 1.2%.
• The University of Michigan’s Surveys of Consumers report for May showed a bit more optimism compared to April. The Index of Consumer Sentiment rose to 95.8 from 89.0 in April. The Current Economic Conditions index increased from 106.7 in April to 108.6 in May, and the Index of Consumer Expectations jumped almost 10 points, from April’s 77.6 to 87.5 in May. According to the report, “consumer sentiment rebounded in early May due to more frequent income gains, an improved jobs outlook, and the expectation of lower inflation and interest rates.”
• For the week ended May 7, there were 294,000 claims for unemployment insurance, an increase of 20,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.6% from the prior week’s revised level. The advance number for continuing unemployment insurance claims for the week ended April 30 was 2,161,000, an increase of 37,000 from the previous week’s revised level.

Eye on the Week Ahead

Information this week focuses on inflation data and retail sales. The week also brings the latest figures on import and export prices, which could get a boost from surging oil prices.

The Markets (as of market close May 6, 2016)

A mixed bag of economic indicators headlined by an underwhelming jobs report, coupled with news of continuing financial trouble in Puerto Rico, pushed stocks lower for the second week in a row. Each of the indexes listed here lost value by last week’s end with the Russell 2000 and the Global Dow falling the most. Following last Friday’s jobs report, the yield on 10-year Treasuries fell to 1.70% before climbing a bit by the end of the day to 1.77%–still 6 points lower than the prior week’s closing yield.

Crude oil (WTI) fell slightly, closing the week at $44.56 a barrel, down $1.36 under the prior week’s closing price. The price of gold (COMEX) also dropped by last week’s end, selling at $1,289.70 by late Friday afternoon, down from the prior week’s closing price of $1,295.90. The national average retail regular gasoline price increased to $2.240 per gallon on May 2, 2016, $0.078 above the prior week’s price but $0.424 below a year ago.

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

• Job growth slowed in April, according to the latest report from the Bureau of Labor Statistics. Total nonfarm payroll employment increased by 160,000 in April, and the unemployment rate was unchanged at 5.0%. However, over the prior 12 months, employment growth had averaged 232,000 per month. Job gains occurred in professional and business services, health care, and financial activities. Job losses continued in mining. The number of unemployed persons was little changed at 7.9 million, and the number of long-term unemployed (those jobless for 27 weeks or more) declined by 150,000 to 2.1 million in April. Both average wages and the length of the average workweek increased in April, with the workweek lengthening by 0.1 hour to 34.5 hours, and payrolls gaining $0.8 per hour to $25.53.
• New orders for manufactured goods increased $5.0 billion, or 1.1%, to $458.4 billion in March, according to the latest report from the Census Bureau. Shipments increased 0.5% and inventories gained 0.2%. However, unfilled orders dropped $1.2 billion, or 0.1%. The overall gain in new factory orders for March is tempered, somewhat, by the fact that it follows February’s 3.1% decrease, and is down 2.2% year-on-year.
• Despite the positive factory report for March, April didn’t start off very well for U.S. manufacturers, as the purchasing managers’ indexes for both Markit and the Institute for Supply Management (ISM®) fell in April. The Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 50.8 in April, down from 51.5 in March and only slightly above the 50.0 no-change threshold. The latest reading was weaker than the average seen in the first quarter of 2016 (51.7) and signaled the slowest improvement in overall business conditions for just over six-and-a-half years.
• The ISM® Purchasing Managers’ Index fell 1.0 percentage point to 50.8% in April. The New Orders Index registered 55.8%, a decrease of 2.5 percentage points from the March reading. The Production Index registered 54.2%, 1.1 percentage points lower than the March reading.
• Non-manufacturing (service) business activity expanded in April, as the composite ISM® Non-Manufacturing Index increased 1.2 percentage points over the March NMI® of 54.5%. For April, the New Orders Index (3.2 percentage points), the Employment Index (2.7 percentage points), and the Prices Index (4.3 percentage points) all increased over their respective March readings, with only the Non-Manufacturing Business Activity Index falling by 1.0 percentage point.
• According to the Census Bureau, construction spending during March was estimated at a seasonally adjusted annual rate of $1,137.5 billion, 0.3% above the revised February estimate of $1,133.6 billion. The March figure is 8.0% above the March 2015 estimate of $1,052.9 billion. For the month, both private residential construction (1.6%) and nonresidential construction (0.7%) were above their respective February totals.
• The goods and services deficit was $40.4 billion in March, down $6.5 billion from February. March exports were $176.6 billion, $1.5 billion less than February exports. March imports were $217.1 billion, $8.1 billion less than February imports. Year-to-date, the goods and services deficit decreased $1.0 billion, or 0.8%, from the same period in 2015. Exports decreased $30.5 billion, or 5.4%. Imports decreased $31.6 billion, or 4.5%. While the narrowing of the trade gap may appear to be a positive, the fact that imports decreased is indicative of slowing domestic demand for goods and services and curtailed consumer spending. Falling exports shows an ongoing weakened demand for American-made goods and services abroad, spearheaded by the continued strength of the dollar. In general, this report is not a good sign for projecting economic growth.
• Nonfarm business sector labor productivity decreased at a 1.0% annual rate during the first quarter of 2016, the U.S. Bureau of Labor Statistics reported, as output increased 0.4% while hours worked increased 1.5%. From the first quarter of 2015 to the first quarter of 2016, productivity increased 0.6%. Productivity is essentially the measure of the output of goods and services for each hour worked. For the first quarter of 2016, it took workers more time to produce fewer goods and services.
• The debt crisis in Puerto Rico worsened last week as the island’s Government Development Bank (GDB) could not make a debt payment of about $367 million. The latest missed payment has prompted some in Washington to consider legislation that would allow the U.S. territory to restructure more than $70 billion in debt. Puerto Rico was able to reach a tentative agreement with the hedge funds that own the bonds of the GDB to exchange some unsecured bonds for new, secured bonds for what amounts to about $0.56 on the dollar. Further adding insult to injury, the ongoing risk of the Zika virus has emerged as a serious health issue.
• For the week ended April 30, there were 274,000 claims for unemployment insurance, an increase of 17,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate fell to 1.5%. The advance number for continuing unemployment insurance claims for the week ended April 23 was 2,121,000, a decrease of 8,000 from the prior week’s revised level.

Eye on the Week Ahead

Two important economic reports are to be published at the end of the week. The Census Bureau releases the latest information on consumer spending in April through the retail sales report. Overall retail sales dropped off in March, as consumers spent less and saved more. The report on what producers are charging for consumer goods and services is highlighted in the Producer Price Index from the Bureau of Labor Statistics. Another sign of sluggish inflationary trends along with the retail sales, producer prices also fell in March.

The Markets (as of market close April 29, 2016)

Despite a poor close to the month, the indexes listed here improved in April (with the exception of the Nasdaq) compared to their March closing values–but not by much. The Dow gained a scant 88.55 points over the month, while the S&P 500 increased less than 0.3%. On the year, only the Russell 2000 and the Nasdaq remain below their year-end values.

Bond yields increased by the close of trading for April as prices fell, presumably due to investor money moving back to equities. The price of gold (COMEX) increased by month’s end, selling at $1,294.90–about $62 higher than March’s end-of-month price of $1,233.00.

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.

The Month in Review

• Employment: The labor market continued its strong run in March based on the latest information from the Bureau of Labor Statistics. Total nonfarm payroll employment rose by 215,000 in March, and the unemployment rate was little changed at 5.0%. Employment increased in retail trade, construction, and health care. Job losses occurred in manufacturing and mining. There were 8 million unemployed persons, while the labor force participation rate increased slightly to 63% from 62.9% in February, and is up 0.6% since September. The average workweek remained at 34.4 hours. Average hourly earnings for all employees on private nonfarm payrolls increased by $0.07 to $25.43, following a $0.02 decline in February. Over the year, average hourly earnings have risen by 2.3%.
• FOMC/interest rates:Following its latest meeting in April, the Federal Open Market Committee decided to maintain the target range for the federal funds rate at 0.25% to 0.50%. With inflation running below the Committee’s 2.0% target rate, the federal funds rate is expected to remain, for some time, below levels that are expected to prevail in the longer run, which leaves the timing of the next rate increase open to speculation.
• Oil: Crude oil prices gained over the month, closing over $45 for the first time since February–this despite the inability of several major oil-producing countries to reach an agreement to cap production. At the end of April, crude oil (WTI) was selling at $45.92 per barrel, compared to the $37.49 per barrel closing price at the end of March.
• GDP/budget: The first estimate of the GDP for quarter one revealed only marginal growth at 0.5%, compared to the fourth-quarter annualized growth rate of 1.4%. Positives in the first-quarter GDP include residential spending and state and local government spending, which were offset by decreases in nonresidential (business) investment, consumer spending, federal government spending, increasing imports, and decreasing exports. While this report is based on economic information that will surely be updated in the coming months, initial estimates show an overall economy that isn’t expanding at any great pace. Since October, the federal deficit is up almost 4.9% compared to the first half of 2015, and sits at about $461 billion. In March, the deficit was $108 billion, $55.13 billion over the deficit a year ago, as spending in March on Social Security and Medicare increased 3% and 6%, respectively.
• Inflation: The latest inflation rate for the United States based on consumer prices is 0.9% through the 12 months ended March 2016 as published by the Bureau of Labor Statistics on April 14, 2016–well below the Fed’s stated target rate of 2.0%. Overall, the Consumer Price Index rose 0.1% in March from February. Over the last twelve months, the index had increased 0.9%. However, the gain (0.1%) in the core prices index less food and energy was the smallest increase since last August. Personal consumption expenditures, the Fed’s favored measure of inflation, rose only 0.1% in March over February and has increased 0.8% since last March, certainly below the Fed’s 2.0% inflation target rate for the 47th consecutive month. The Producer Price Index, which measures the prices companies receive for goods and services, fell 0.1% in March following a 0.2% decline in February. Prices for services declined 0.2% for the month, while prices for goods, which had dropped each of the previous eight months, rose 0.2% in March. Retail sales for goods and services dipped 0.3% in March, although they’re still 1.7% ahead of last March. Retail sales, excluding auto and gas, actually rose 0.1% for the month, while total sales for the first quarter of 2016 are up 2.8% compared to the same period a year ago.
• Housing: The housing sector was a mixed bag of good and bad in March. New home construction fell a sharp 8.8% from February. Single family home starts fell 9.2%, and multifamily starts dropped 8.5%. Applications for building permits were down 7.7%–not a positive sign for new home construction. The latest figures from the Census Bureau show that the 511,000 annual rate of sales of new single-family homes in March is 1.5% below February’s revised rate of 519,000, but 5.4% above the March 2015 estimate of 485,000. The median sales price of new houses sold in March was $288,000 ($297,400 in February), while the average sales price was $356,200 ($342,100 in February). The seasonally adjusted estimate of new houses for sale at the end of March was 246,000–a supply of 5.8 months at the current sales rate. On the other hand, sales of existing homes were up 5.1% in March at an annualized rate of 5.330 million. According to the latest report from the National Association of Realtors®, year-on-year sales growth of existing homes is up 11.0%. The median sales price for existing homes increased 5.0% over February to $222,700, which marks the 49th consecutive month of year-over-year gains. Total housing inventory at the end of March increased 5.9% to 1.98 million existing homes available for sale, which is still 1.5% lower than a year ago (2.01 million).
• Manufacturing: Manufacturing and industrial production had been relatively weak sectors in the economy for quite some time, and some indicators in March are proving that trend is continuing. According to the Federal Reserve’s report for March, industrial production decreased 0.6% for the second month in a row. For the first quarter, industrial production fell at an annual rate of 2.2%. Durable goods orders increased 0.8% for March, following a downwardly revised 3.1% drop in February. Shipments of durable goods dropped 0.5% and unfilled orders fell 0.1%. Manufacturers are guardedly optimistic as reflected in a couple of noted purchasing managers’ indexes. The Markit U.S. Manufacturing Purchasing Managers’ Index™ was 51.5 for March–only slightly ahead of February’s 51.3. The Institute for Supply Management PMI for March was 51.8%, showing expansion for the first time in six months.
• Imports and exports: Based on the advance report from the Census Bureau, the international trade in goods deficit was $56.899 billion in March, down from $62,864 billion in February. The trade in goods deficit for March is reflective of $116,733 billion of exports and $173,632 billion of imports. Based on advance figures, the trade in goods deficit for the first three months of 2016 sits at $181,991 billion. In a report from the Bureau of Labor Statistics, prices in March for U.S. imports increased 0.2% following February’s 0.4% drop, primarily driven by an increase in fuel and lubricant prices, which jumped 4.9%. Excluding petroleum, import prices actually fell 0.2%. Despite the monthly increase, overall import prices remained down over the past year, falling 6.2% from March 2015. U.S. export prices recorded no change in March after falling 0.5% in February.
• International markets: Japan experienced a major earthquake on April 14, killing many and forcing the evacuation of thousands of Japanese. It is not certain what impact the devastating earthquake will have on Japan’s major industries, but it’s sure to affect manufacturing as well as imports and exports. Greece and its creditors continued negotiations over further austerity measures to be implemented by the country in exchange for additional loans and debt relief. The European Central Bank maintained its interest rates as the benchmark rate remained at 0%. The GDP in Great Britain fell to 0.4% in the first quarter, while China’s GDP growth weakened to 6.7%. Sixteen major oil producers were unable to come to an agreement on reducing oil production, likely leading to continued weakness in crude oil prices.
• Consumer sentiment: The Conference Board Consumer Confidence Index® for April fell to 94.2 from March’s revised 96.1, driven by low expectations for future job availability. The University of Michigan’s Index of Consumer Sentiment fell to 89 in April, compared with 91.0 in March as consumer expectations for an improving economy continue to wane.

Eye on the Month Ahead

The start of the second quarter saw the markets recover from their end-of-year regression. However, the economy as a whole hasn’t picked up steam as noted by the FOMC following its April meeting. As we wind through May, all eyes will be on important economic indicators such as the GDP, residential housing, labor, and consumer spending in an attempt to determine the direction of the economy heading into the summer months.

The Markets (as of market close April 29, 2016)

The markets suffered their worst week of losses since February as each of the indexes listed here ended the week in negative territory. The Nasdaq fell the most by the end of the week, down over 2.5%, as the technology sector declined following investor sell-offs. Long-term bond yields dipped for the week as prices rose, possibly influenced by the Fed’s decision to maintain interest rates at their current level.

Crude oil (WTI) closed the week over $45 for the first time since November at $45.92 a barrel, up $2.28 over the prior week’s closing price. The price of gold (COMEX) rose by last week’s end, selling at $1,295.90 by late Friday afternoon, up from the prior week’s closing price of $1,233.70. The national average retail regular gasoline price increased to $2.162 per gallon on April 25, 2016, $0.025 above the prior week’s price but $0.408 below a year ago.

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

• Following its April meeting, the Federal Open Market Committee decided to maintain the federal funds rate at its present 0.25% to 0.50% range. The Committee noted that labor market conditions continue to improve even as economic growth has slowed. While household income has increased, household spending has moderated. Earlier declines in energy prices and falling non-energy imports has contributed to weakened inflationary pressures as inflation, which is expected to remain low in the near term, remains below the Committee’s target inflation rate of 2.0%. Housing continues to improve but business investment and exports remain soft. The Committee will continue to monitor both domestic and world economic conditions, paying particular attention to inflationary trends. Nevertheless, “the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
• The initial estimate for the first quarter gross domestic product showed a very modest increase of 0.5%. The fourth quarter GDP increased 1.4%. While this advance estimate is likely to change as more data is made available, the initial report marks the slowest GDP growth in two years. After reaching a 3.9% growth rate in the second quarter of 2015, the GDP has regressed since. While the labor market and residential investment remain strong, business investment has slowed as has consumer spending, leading to the deceleration of the GDP.
• As noted by the FOMC following its April meeting, inflation is accelerating at a very modest rate. Personal income and disposable personal income (net after taxes) grew by a scant 0.4% in March, according to the latest report from the Bureau of Economic Analysis. Personal consumption expenditures effectively remained at its current level, inching up only 0.1% from February. As it relates to inflationary trends, the price index increased only 0.8% from March 2015, well below the Fed’s target rate of 2.0%. Excluding volatile food and energy categories, growth in the core prices also has fallen short of the target, gaining 1.6% year-on-year.
• Compensation costs for civilian workers increased 0.6% for the three-month period ended in March 2016, according to the U.S. Bureau of Labor Statistics. Wages and salaries (which make up about 70% of compensation costs) increased 0.7%, and benefits (which make up the remaining 30% of compensation) increased 0.5%. Total employee compensation gained 1.9% for the quarter, lagging behind the annual gain of 2.0% from the prior three quarters. Compared to the first quarter of 2015, wages and salaries have increased 2.0%, while benefits increased 1.7%.
• The number of new homes sold in March fell for the fourth consecutive month. The 511,000 annual rate of new home sales was 1.5% lower than February’s revised annual rate of 519,000. The March rate is still 5.4% above the March 2015 rate of 485,000. The median sales price of new houses sold in March was $288,000 ($9,400 below February’s median sales price), while the average sales price was $356,200. The seasonally adjusted estimate of new houses for sale at the end of March was 246,000, which represents a supply of 5.8 months at the current sales rate.
• An indication of future home sales based on contract signings, the Pending Home Sales Index from the National Association of Realtors® climbed 1.4% in March to 110.5 following February’s downwardly revised 109.0. The index has increased year-over-year for 19 consecutive months and is at its highest reading since May 2015 (111.0). Home sale activity is relatively strong despite supply deficiencies and rising home prices.
• The rate of homeownership is falling, according to the latest information from the Commerce Department. The homeownership rate of 63.5% was 0.2 percentage point lower than the first-quarter 2015 rate (63.7%) and 0.3 percentage point lower than the fourth-quarter 2015 rate (63.8%). The current homeownership rate is close to its 48-year low of 63.4% reached in last year’s second quarter.
• The Conference Board Consumer Confidence Index® fell in April to 94.2, down from 96.1 in March. The Present Situation Index increased from 114.9 to 116.4, while the Expectations Index decreased from 83.6 to 79.3 in April. While consumer respondents thought current economic conditions have improved, their short-term expectations were less optimistic, particularly with respect to business conditions and the labor market.
• The Index of Consumer Sentiment fell from 91 to 89 in April, down 2.2% for the month and 7.2% year-on-year. The survey from the University of Michigan notes that consumer expectations for the economy suffered the largest drop, falling 4.8% from March and 12.6% from a year ago.
• Good news for the manufacturing sector as the preliminary report on new orders for manufactured durable goods in March increased $1.8 billion, or 0.8%, to $230.7 billion, following a 3.1% drop in February. Excluding transportation, new orders actually fell 0.2% and excluding defense, new orders dropped 1.0%. Shipments of manufactured durable goods in March, down three of the last four months, decreased $1.1 billion, or 0.5%, to $237.0 billion. Unfilled orders for manufactured durable goods in March, down three of the last four months, decreased $1.3 billion, or 0.1%, to $1,182.5 billion. Inventories of manufactured durable goods increased less than $0.1 billion, virtually unchanged at $394.1 billion in March following a 0.3% February decrease.
• The Census Bureau’s advance report on international trade in goods for March reveals the trade deficit narrowed to $56,899 billion, down from $62,864 billion in February. Total exports were $116,733 billion in March ($118,698 billion in February), while imports totaled $173,632 billion ($181,562 billion in February), each sector falling from the prior month. This advance report shows not only a narrowing trade deficit, but also an overall slowing of trade activity.
• For the week ended April 23, there were 257,000 claims for unemployment insurance, an increase of 9,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for continuing unemployment insurance claims for the week ended April 16 was 2,130,000, a decrease of 5,000 from the prior week’s revised level.

Eye on the Week Ahead

The week begins with information from the manufacturing sector, which has been growing at a snail’s pace. The week ends with the latest report on the employment situation, which may influence the markets as it can affect several major sectors of the economy.