Author: dredheadz

The Markets

Reassurance from the Fed seemed to outweigh the situation in Iraq last week as investors showed greater comfort with taking on more risk. The week’s biggest gains were in the small caps of the Russell 2000, which once again returned to positive territory for the year, while the Nasdaq closed the week at a level it hasn’t seen since April 2000. Meanwhile, the Dow and S&P 500 set new record highs yet again–the 11th so far this year for the Dow, the 22nd for the S&P 500.

The Markets

Equities took a break across the board from their recent upward surge. After fresh all-time record closes early in the week, both the S&P 500 and the Dow Industrials saw profit-taking that also returned the small caps of the Russell 2000 to negative territory for the year. Renewed conflict in Iraq contributed to equities’ swoon, raising concerns about global oil supplies and pushing oil to roughly $107 a barrel.

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

• U.S. retail sales rose 0.3% in May and were 4.3% higher than a year earlier. The Department of Commerce said the biggest increases were seen at auto and auto parts dealers, building/garden supplies stores, and miscellaneous store retailers such as florists, office suppliers, and used-merchandise stores.
• Wholesale prices fell 0.2% in May, leaving the wholesale inflation rate for the last 12 months at 2%. According to the Bureau of Labor Statistics, that’s down slightly from the previous month, but substantially higher than the 1% of last May. The decline in prices at the final stage of wholesale distribution was evenly split between goods and services. Inflation is one of the measures being watched by the Federal Reserve as it unwinds its bond-buying efforts.
• The World Bank cut its estimate of 2014 global economic growth to 2.8% rather than the 3.2% it predicted in January. The Global Economic Prospects report said developing countries have been especially hurt by bad weather in the United States, a slowing housing market in China, political conflicts, and slow progress on structural economic reform; the report sees emerging-market growth at 4.8% this year rather than 5.3%. However, 2015 is expected to be better, with a 3.4% global growth rate and 5.4% growth in the developing economies.

Eye on the Week Ahead

The Fed is expected to once again reduce its monthly bond purchases, and options expiration at the end of the week could mean volatility as traders on the wrong side of equities’ recent surge attempt to manage those positions. U.S. manufacturing data and the state of the oil market also could influence the mood of the markets.

The Markets

For the third straight week, both large- and small-cap indices surged upward. Once again, the S&P 500 and the Dow industrials set new record highs, while the small caps of the Russell 2000 returned to positive territory for the year. The enthusiasm for equities took a toll on the benchmark 10-year Treasury note, whose yield rose as prices fell.

Last Week’s Headlines

• The U.S. economy has finally regained all of the jobs lost during the recession that officially began in December 2007. The 217,000 jobs created in May put total employment at 138.4 million–higher than the previous peak recorded in January 2008. It was the fourth straight month in which the number of new jobs has exceeded 200,000. However, the Bureau of Labor Statistics said the unemployment rate remained unchanged at 6.3%. Also, including workers who are underemployed would put the unemployment rate at 12.2%, down from a peak of 17.2%.
• Going negative: To encourage lending, the European Central Bank cut the interest rate it pays banks for holding their deposits to -0.1%; rather than paying interest on deposits, it’s essentially charging banks for holding their cash. The ECB also cut its refinancing rate–the rate banks must pay when they borrow from the ECB–from 0.25% to 0.15%. President Mario Draghi said the ECB will offer targeted long-term refinancing operations (TLTROs) in September and December, which will allow banks to borrow up to three times the amount they lend out, and may also buy certain asset-backed securities. Draghi also said the ECB is prepared to do more if these measures don’t do enough to stimulate the economy.
• The Environmental Protection Agency announced a sweeping plan to cut carbon pollution nationwide from existing power plants by 30% below 2005 levels. The plan would give individual states a year in which to identify how they would meet the target between now and 2030, and give the public 120 days to comment on the EPA’s proposal.
• U.S. manufacturing continued to rebound. The Commerce Department said the 0.7% increase in factory orders in April (fueled in part by orders for military equipment) was the third straight monthly increase. Meanwhile, the Institute for Supply Management’s manufacturing index also showed acceleration, rising 0.5% to 55.4% in May. The ISM said the services sector, which represents a larger segment of the economy, saw even stronger gains, rising 1.1% in May to 56.3%.
• Construction spending also was up in April, according to the Commerce Department. The 0.2% increase from March put spending 8.6% above the same time last year. Residential construction was up 0.1% for the month, while commercial construction slid 0.1%. Spending on public projects such as schools and highways rose 0.8%.
• The U.S. trade deficit rose more than 6% in April as imports hit a record high of more than $240 billion and exports slowed for the fourth month out of the last five. According to the Bureau of Economic Analysis, the growth in imports stemmed largely from spending on foreign autos, computers, food, and consumer goods.
• Anecdotal reports from the Federal Reserve’s “beige book” report showed the economy continued to improve along with the weather. All 12 districts reported economic expansion, and upward pressure on wages, which could trigger inflation, remained subdued.

Eye on the Week Ahead

In a week light on economic data that could serve as a catalyst for market movements, trading volumes that also have been light in recent weeks could magnify any volatility. Investors–at least those that aren’t on vacation–will try to assess whether recent upward movement reflects an economy emerging from winter worries or a last surge before summer doldrums set in.

The Markets

Equities took a downward revision to the U.S. GDP figure in stride; the Nasdaq continued to rebound while the S&P 500 and Dow industrials both hit new all-time closing highs. The recent rally in bonds continued as the benchmark 10-year Treasury yield hit its lowest level since last June. And after bouncing around for several weeks on either side of $1,300, the price of gold plummeted almost $50 an ounce last week, leaving it at roughly $1,245 an ounce and down almost 10% since spiking in mid-March.

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

• Rather than stalling, as previously estimated, the U.S. economy actually contracted at an annualized rate of 1% during 2014’s first quarter. The Bureau of Economic Analysis said businesses’ investment in building up inventories was lower than previously estimated and was a major factor in the downward revision of its GDP estimate, which was widely expected to be disappointing. It was the weakest growth rate in three years. Consumer spending was up 3.1%, but couldn’t offset the cost of higher imports and declines in capital investments and spending by state and local governments.
• Durable goods orders rose 0.8% in April–the third straight monthly increase. The Census Bureau said the 2.3% increase in defense-related spending on transportation equipment was the most significant factor; business spending on capital equipment was down 1% for the month.
• Home prices were up 0.9% in the 20 cities measured by the S&P/Case-Shiller 20-City Composite Index for March.
• After a strong March, consumer spending slid 0.1% in April; the Commerce Department said it was the first monthly decline in a year. However, at least part of the decline was the result of lower heating costs as winter finally wound down. Personal income rose 0.3%, but that was the smallest monthly gain so far in 2014. However, coupled with the decline in spending, that allowed people to save more; the savings rate for individuals was 4% compared to March’s 3.6%.
• The average rate for a 30-year fixed-rate mortgage fell to 4.12% last week. Mortgage giant Freddie Mac said that’s the lowest it’s been since last October; however, it’s still higher than last May’s 3.81%. Mortgage rates have been cited as one reason for recent sluggishness in the housing market’s recovery.

Eye on the Week Ahead

As always, unemployment numbers will be of interest, as will Institute for Supply Management reports on both the manufacturing and services sectors. Investors also will watch to see whether the European Central Bank follows through on hints it might adopt measures to stimulate the economy there.

The Markets

“Sell in May, go away” wasn’t a winning strategy last month. Investors regained interest in Nasdaq stocks, giving the index its strongest gains since February. The Russell 2000, which along with the Nasdaq had been pummeled in April, also managed to eke out a positive performance in May. Meanwhile, by the end of the month, both the S&P 500 and the Dow had set new record closing highs, even shrugging off a disappointing Q1 GDP report. And renewed confidence in emerging markets helped power gains in the Global Dow; for the second straight month, it had the second-best year-to-date performance of the five indices in the table below.

Bonds continued to rally, sending the benchmark 10-year Treasury yield to its lowest level since last June. After bouncing around on either side of $1,300 an ounce, gold resumed the downward path it’s been on since mid-March; a nearly $50-an-ounce loss in May’s final week took it to roughly $1,245. Meanwhile, oil prices rose solidly above $103 a barrel and settled there for much of the month.

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

• The U.S. economy contracted at an annualized rate of 1% during Q1 2014; the Bureau of Economic Analysis said it was the weakest growth rate in three years. Consumer spending was up 3.1% during the quarter, but couldn’t offset the impact of higher imports and declines in capital investments and spending by state and local governments.
• The unemployment rate saw its biggest drop since December 2010, falling from 6.7% to 6.3%; that’s the lowest it’s been since September 2008. Also, the Bureau of Labor Statistics said the number of new jobs created–288,000–was far greater than the last 12 months’ 190,000 monthly average and represented the strongest job creation in more than two years. However, the report wasn’t all good news; the drop in the unemployment rate also resulted partly from 806,000 people leaving the labor force.
• Warmer weather helped cut heating costs, which the Commerce Department said was a key reason for the first monthly decline in consumer spending in a year. The Commerce Department’s May report also showed retail sales flattening out despite a 0.3% increase in consumer prices that put the consumer inflation rate for the last 12 months at 2%. The Bureau of Labor Statistics said wholesale prices also rose at a rapid pace; the 0.6% increase was the biggest monthly gain since September 2012.
• Manufacturing data was mixed. Durable goods orders saw their third straight monthly increase, with defense-related spending on transportation the most significant factor. However, business spending on capital equipment was down 1% for the month. And after two straight months of increases, the Federal Reserve’s measure of industrial production fell 0.6%. However, the Institute for Supply Management’s manufacturing survey showed expansion accelerating.
• As more homeowners put their houses on the market in April, the National Association of Realtors^® said sales of existing homes saw their first monthly increase of the year, rising 1.3%. The Commerce Department’s measure of new home sales also jumped 6.4%. However, both numbers were lower than a year earlier. Meanwhile, prices in the 20 cities tracked by the S&P/Case-Shiller 20-City Composite Index were up 0.9% and housing starts rose 13.2%, with a nearly 43% increase in apartment construction leading the way. Meanwhile, the average rate for a 30-year fixed-rate mortgage fell to 4.12%. Mortgage giant Freddie Mac said that’s the lowest it’s been since last October, though it’s still higher than last May’s 3.81% (an increase that has been cited as one reason for recent sluggishness in the housing market).
• A Pennsylvania federal grand jury charged five members of a Chinese military unit with stealing industrial secrets by hacking computers at six U.S. enterprises in the nuclear, solar, and metals industries. The indictment is said to be the first involving a governmental body rather than an individual corporation.
• The eurozone economy grew 0.2% during Q1, roughly the same pace as the previous quarter, while the 0.3% growth in the 28-member European Union was slightly less than in Q4 2013. The inflation rate in both areas rose slightly to 0.7% in the eurozone and 0.8% for the EU, allowing the European Central Bank to leave its key interest rate unchanged at 0.25%.

Eye on the Month Ahead

As summer gets under way, investors will watch to see whether signs of revived economic momentum can be sustained. Housing data will be key to the Fed’s continued winding down of its bond purchases.

The Markets

After spending weeks bouncing around just under 1,900, the S&P 500 finally managed to top it on Friday, setting a new record closing high in the process. And after a lot of back and forth at the beginning of the week, the Nasdaq and the Russell 2000 small caps rebounded strongly from their travails of recent weeks, though the small caps are still down for the year.

Last Week’s Headlines

• Discussion among members of the Federal Reserve’s monetary policy committee has begun to turn to how best to manage the impact of the end of supportive economic measures, whenever that seems appropriate. According to minutes of the committee’s most recent meeting, the state of the labor market was a major point of debate and will continue to play a major role in Fed policy.
• As more homeowners put their houses on the market in April, sales of existing homes rose 1.3% over the course of the month. It was the first monthly increase this year, but the National Association of Realtors® said that still left home resales 6.8% lower than the previous April.
• New home sales also jumped in April; the Commerce Department said they were up 6.4% for the month, though that was 4.2% below April 2013.
• Parties campaigning on anti-European Union themes gained ground in the EU’s parliamentary elections over the weekend. However, a majority of seats are still held by mainstream parties, so financial assistance programs for weaker members shouldn’t see any immediate disruption.
• Credit Suisse agreed to pay $2.5 billion to settle federal charges that for decades it had helped Americans avoid taxes by concealing assets in undeclared bank accounts. The Swiss bank also pleaded guilty to a criminal charge of conspiracy.
• China’s manufacturing sector was on the brink of expansion in May, according to the Markit Purchasing Managers Index. The reading on the monthly survey hit a four-month high of 49.7% (a reading of 50% indicates expansion). China also gave Russia some relief from Western economic sanctions by signing a $400 billion agreement to purchase gas from Russia’s leading supplier.
• A Pennsylvania federal grand jury charged five members of a Chinese military unit with stealing industrial secrets by hacking computers at six U.S. enterprises in the nuclear, solar, and metals industries. The indictment is said to be the first involving a governmental body rather than an individual corporation.

Eye on the Week Ahead

During the holiday-shortened week, investors will assess the results of the EU elections. They also will get a second look at Q1 economic growth and a smattering of manufacturing, housing, and consumer data.

The Markets

Equities were very much a mixed bag last week. After the Dow and S&P 500 set fresh all-time closing records early in the week, a strong downdraft on Thursday flattened out the S&P for the week and took the Dow back into negative territory year-to-date. The Nasdaq, which has suffered in recent months, saw a positive week, while the small-cap Russell 2000 ended the week down almost 9% from its March high. The pain in domestic equities left the Global Dow the year-to-date leader. Meanwhile, a rally in the 10-year Treasury sent the yield to its lowest level since last October.

Last Week’s Headlines

• After a strong surge in March, retail sales flattened out in April, rising just 0.1%. The Commerce Department said online sales, sales of electronics/appliances, and those at restaurants and bars all declined, while clothing, auto, and department store sales saw gains.
• Wholesale prices saw a sharp increase last month, rising at their fastest pace since September 2012. The Bureau of Labor Statistics said April’s 0.6% increase followed a 0.5% jump in March, and was evenly distributed between goods and services. April’s increase put wholesale inflation for the last 12 months at 2.1%.
• Consumer prices also increased in April at a rapid pace; the 0.3% increase was the biggest monthly jump since last June. A 2.3% increase in the cost of gas and a 0.4% increase in food (beef alone was 2.9% higher) were key. April’s increase put the consumer inflation rate for the last 12 months at 2%, which is the level the Federal Reserve has informally targeted as appropriate.
• The Federal Reserve’s manufacturing indexes were both positive in May. The reading on the Empire State index rebounded 18 points from a weak March, while the Philly Fed reading declined slightly but had its third consecutive positive month.
• U.S. industrial production fell 0.6% in April after a 1% gain in both February and March. The Federal Reserve said milder weather cut the need for heat, which led to a 5.3% decline in utilities output, while mining production rose 1.4%. Use of total capacity at the nation’s factories slid 0.7% and was 1.5% below its average over the last 40 years.
• Housing starts rose strongly in April, with a nearly 43% increase in apartment construction responsible for most of the gain. The Commerce Department said new starts were up 13.2% for the month, and were more than 26% higher than in April 2013. Building permits–an indicator of future activity–were up 8% from March and were almost 4% higher than a year earlier.
• The eurozone economy grew 0.2% during Q1, roughly the same pace as the previous quarter, while the 0.3% growth in the 28-member European Union was slightly less than the 0.4% of Q4 2013. The strongest growth was in Germany, Hungary, Poland, and the United Kingdom. The Q1 figure meant that the eurozone grew 0.9% (1.4% for the EU) compared to the same quarter a year earlier. Meanwhile, the official EU statistical office said the inflation rate rose slightly in both areas, to 0.7% in the eurozone and 0.8% for the EU. Though both inflation rates were an improvement, they were still far below those of the previous year, and the annualized rate for seven countries was negative.

Eye on the Week Ahead

In a week that’s light on economic data, minutes of the most recent Fed meeting, a report on Chinese manufacturing, and housing market statistics could receive more-than-usual interest.

The Markets

A fresh closing high on the Dow on Friday finally enabled it to edge back into positive territory for the year, while the S&P 500 ended the week basically flat. However, after the prior week’s respite from selling pressure, the Nasdaq and the small caps of the Russell 2000 returned to their recent losing ways.

Last Week’s Headlines 

• Growth in the U.S. services sector accelerated in April. The Institute for Supply Management’s gauge rose 2.1% to 55.2%. It was the 51st straight month of growth.
• Greater demand overseas for U.S. exports of natural gas and oil as well as aircraft helped cut the U.S. trade deficit by 3.6% in March, according to the Commerce Department. Exports were up 2.2%, while imports also rose 1.7% to their highest level in two years.
• Federal Reserve Chair Janet Yellen told a congressional committee that the Fed sees a rebound in the economy from winter’s weather-induced slump, but that low inflation and slack in the housing and labor markets will most likely continue to permit interest rates to remain near zero for some time.
• Yet another data point from the Federal Reserve confirmed winter’s impact on the economy during Q1. Business productivity slumped at an annualized rate of 1.7%, a far cry from the previous quarter’s 2.3% increase. However, productivity was 1.4% ahead of Q1 2013. Even though workers put in more hours during the quarter, reduced output helped push unit labor costs up 4.2% for the quarter.
• The European Central Bank once again left its key interest rate unchanged at 0.25% and said that ongoing low inflation might lead to stimulus measures next month, especially if the situation in Ukraine worsens.

Eye on the Week Ahead

With the bulk of Q1 earnings reports now in the rear-view mirror, investors will have to look to manufacturing and retail reports in both the United States and China for guidance. Inflation at both the consumer and wholesale levels is expected to remain subdued, while housing starts could show whether the housing market is emerging from its winter doldrums.