Federal Reserve/Economic Reports

  • New York Federal Reserve President William Dudley said in an interview with the New York Times that two rate hikes from the Fed are still a “reasonable expectation” this year.” However, markets are disregarding these comments, because Fed fund futures show little likelihood of a rate hike this year, with December reflecting just a 50% probability.
  • Real GDP for the first quarter was reported at 0.5%, slightly below economists’ revised estimate of 0.7%. Residential investment rose at a 14.8% annual rate, spending on services rose at a 2.7% annual rate (led by housing, utilities and health care), and private nonresidential fixed investment (capex) fell at a 5.9% annual rate. Additionally, inventories and net exports declined, and government spending rose at a 1.2% annual rate. Real final sales to domestic purchasers rose at a 1.2% annual rate, indicating better-than-headline domestic demand.
  • Nonfarm payrolls disappointed estimates by increasing 160,000 in April, below consensus of 205,000, and the previous two months saw a 19,000 downward revision. It was the lowest since September. Private nonfarm payrolls rose 171,000, and government payrolls fell 11,000. The unemployment rate held steady at 5%, but the labor force participation rate fell back to 62.8%. Average hourly earnings rose 0.3%, bringing the year-over-year gain to 2.5%. Aggregate hours worked rose 0.4% and is up 2.1% over last year. The unemployment rate for the college educated declined to 2.4% from 2.6%.
  • The Bloomberg Consumer Comfort index reflected increasing American consumer pessimism about the economy, their finances and the buying climate as the index fell to its lowest level since December, 42. Slower economic growth and volatile financial markets have made consumers more cautious. Lower-income households showed the most improvement in sentiment.
  • Services activity improved as the ISM Non-Manufacturing Index (NMI) rose 1.2 points in April to 55.7 versus expectations of a 0.4-point improvement. Thirteen industries improved, and four contracted. New orders and employment improved, although business activity was lower. The Prices Index increased 4.3 points, the most since September 2012, indicating that input prices are rising at their fastest pace since 2015.
  • On the other hand, factory activity remains relatively weak. The ISM Manufacturing Index fell to 50.8 in April, below consensus looking for 51.2. Production and new orders improved moderately, inventories fell, supplier deliveries improved (indicating a lack of pressure on operating capacity), and employment fell. The Price Index spiked to 59.0, its highest level since 2014, indicating rising raw materials prices.
  • Nonfarm productivity fell in the first quarter at a 1% annual rate but better than the predicted decline of -1.4%. Year over year, productivity has risen 0.6%, below the historical annual gain of 2.1%. Combined with labor force’s slow 0.5% growth rate, these factors project weaker-than-historical potential GDP growth.
  • Factory orders improved 1.1% in March, although February was revised down 0.2%, virtually offsetting the improvement. Defense purchases aided a 0.8% rise in durable goods orders, which fell 0.1% excluding defense. The rebound in oil prices sparked a 1.5% improvement in nondurable goods orders. Elevated inventories relative to sales are likely to weigh on production growth.
  • Higher rental and dividend income, combined with wages and government transfer receipts, caused personal income to rise 0.4% in March. Meanwhile, spending, as measured by personal consumption expenditures, rose only 0.1%. This, and reluctance from consumers to spend their savings from lower gas prices, caused the personal savings rate to rise to 5.4%, the highest level since 2012. The PCE Price and Core indices are up year over year by 0.8% and 1.6%, below the Fed’s target of 2%.
  • The latest Atlanta Fed GDPNow forecast for second quarter real GDP, while still early in the quarter, reflects GDP growth of 1.7%, below the consensus estimate of 2.3%.

Financial Markets

  • Markets were generally in a risk-off mode recently. Equity markets pulled back over the recent two week period, with the technology-heavy NASDAQ 100 experiencing the largest domestic decline because of Apple’s large weighting. The index lost 3.2% when Apple declined 12.3% on concerns for future iPhone demand. The S&P 500 declined the least, down 1.6%, while the small cap Russell 2000 fell 2.8%.
  • The energy, financial and materials sectors – large weights in the value style indices – have led the market this last month. Technology and healthcare, weighted heavier in large growth style, have trailed.
  • The international markets declined furthest. The international developed EAFE Index was down 3.8% and emerging markets down 4.7%. Dollar weakness cushioned the decline for U.S.-based investors: The broad Asia index was down 8.7% for Japan-based investors while the MSCI Euro was down 5.7% for Europe-based investors.
  • The dollar lost 3%, before recovering in the latest week to finish the two-week period down 1.3%. Traders considered the dollar oversold, although the general trend remains downward because of views that the Fed will remain on hold until year’s end. Hedge funds and large speculators have increased their positions against the dollar.
  • Treasuries yields fell as weaker-than-expected economic data caused investors anticipate no action on the part of the Fed. The three-to-seven year belly of the curve yields fell the most, down 0.12%. The two-year fell from 0.82% to 0.74%. The 10-year fell from 1.89% to 1.78%, narrowing the two- to 10-year spread moderately to 1.04%.
  • High yield bond spreads moved modestly higher, from 5.87% to 6.08%, in what appears to have been a counter trend move, a result of mutual fund outflow, the first in five weeks, and weaker global economic data.
  • Energy prices moved modestly higher, finishing the week at $44.66 versus $43.73. Forest fires in Canada have taken offline roughly 1 million barrels of oil production per day. Saudi Arabia announced the appointment of a new oil minister, who is expected to maintain aggressive production policy to maintain its market share and drive out higher-cost producers.
  • Gold rebounded from its closing low of $1,233 to $1,289, reaching levels not seen since early 2015. The labor report again influenced direction, as the lower dollar, low borrowing costs and equity market weakness provided incentive to increase holdings in precious metals.
  • 87% of S&P 500 member companies have reported earnings for the first quarter. As is typical, having lowered estimates sufficiently prior to reporting results, 71% have reported above earnings estimates, although only 53% have reported sales above expectations. Materials, consumer staples, consumer discretionary and healthcare are reporting the most favorable comparisons.

Data as of 5/6/16 • Source: Bloomberg

Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.

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