Federal Reserve / Economic Reports

  • The April Federal Reserve meeting minutes confirmed “most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2% objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.” Additionally, in an attempt to address investors’ views regarding a potential rate hike, the Fed minutes stated that “market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the inter-meeting period how the Committee intends to respond to economic and financial developments.”
  • The Leading Economic Index (LEI) rose 0.6% in April, the most in a year and above the consensus estimate of 0.5%. Nine of its 10 components increased, led by the interest rate spread, while consumer expectations for business conditions was the lone negative contributor.
  • Existing home sales rose 1.7% in April, the fourth increase in five months and near the highest level since 2007. Sales were above estimates of a 1.3% gain. A 10.3% improvement in condo and co-op sales led the increase, and single-family sales rose 0.6%. Housing inventory rose 9.2%, bringing available supply to 4.7 months from 4.4 months. Tight inventory and fewer distressed properties brought a sales increase of 6% and a 6.3% rise in median existing home prices, year over year.
  • In a separate report, housing starts rose 6.6% in April, above the consensus estimate of a 3.7% increase. A 10.7% improvement in multifamily starts, the most in 10 months, fed the increase. Single-family starts rose 3.3%, and building permits rose 3.6%, also led by multifamily, although expectations were for a 4.6% increase.
  • Americans grew more upbeat about the economy and their finances as the Bloomberg Consumer Comfort Index rose by 0.9 points from a five-month low to 42.6, led by a 1.8-point improvement in the state of the economy component. Personal finances also improved. Meanwhile, the Bloomberg Economic Expectations Survey for May showed the outlook for the economy was unchanged.
  • The NFIB Small Business Optimism Index improved by 1 point in April to 93.6, above estimates looking for 93. It was the first increase this year and the most in nine months, although still below its cycle high of 100.3, reached in December 2014. Small business owners have grown more cautious about the economic environment. Survey respondents indicated rising labor costs are cutting into business profits and margins, as pricing power remains limited.
  • Retail sales recovered by 1.3% in April, the most in over a year and above the consensus of 0.8%. It was the largest underestimation by economists in three years. Vehicles, gasoline and online trade fueled growth. Excluding vehicles, sales increased 0.8%, also above consensus (0.5%). Excluding vehicles and gasoline, sales rose 0.6%, above the historical average of 0.4%. The only category that declined was building materials, garden equipment and supplies, down 1%. Online sales increased a robust 2.2% this year, and its market share rose to a new record high of 10%.
  • Industrial production (IP) improved by 0.7% in April, well above consensus looking for 0.3%, although March was revised downward by 0.3%. However, this first gain in three months reflects economic activity rebounding in the second quarter. Utility output spiked 5.8%, and manufacturing rose 0.3%, led by machinery, vehicles and auto parts. Excluding vehicles, manufacturing rose 0.2%. Core IP rose 0.3%, led by business equipment. Year over year, IP is down 1.1%, the eighth month in a row. The capacity utilization rate rose 0.5% to 75.4%, the most since November 2014, although this still reflects excess capacity.
  • The Consumer Price Index (CPI) rose 0.4% in April, the most since February 2013 and above expectations for a 0.3% increase. Energy prices increased 3.4%. Food prices rose 0.2%. Increases in transportation, drug, shelter and recreation costs brought the Core CPI 0.2% higher. Vehicle, furnishing and apparel prices experienced declines. Year over year, CPI and core CPI are up 1.1% and 2.1%, respectively.
  • The Producer Price Index (PPI) rose 0.2% in April, below the consensus of 0.3% but its first gain in three months. Core PPI rose 0.1%. PPI is higher by 0.1% over one year prior, up for the first time since December 2014.
  • The latest Atlanta Fed GDPNow forecast for second quarter real GDP improved, and it now projects growth of 2.5%. The Citigroup Economic Surprise Index for the U.S. is at -30.80, indicating economic figures are generally being reported below expectations.

Financial Markets

  • Friday’s rally limited the equity market’s decline for the latest two week period. The S&P 500 and Russell 2000 were off by 0.23% and 0.22%, respectively, while the technology heavy Nasdaq 100 was up 0.76%. The Russell 3000 Value moderately outperformed the Russell 3000 Growth by 0.53%, bringing the YTD total return to up 3.14% vs. -0.99%, respectively.
  • The international markets were down, by 0.83% for the developed EAFE Index and by 3.47% for the Emerging Markets Index for U.S. investors. Dollar strength amplified the decline: The EAFE and ACWI xU.S. increased 1.68% and 1.15%, respectively, for euro-based investors.
  • The dollar rose 1.5% during the period on increased Federal Reserve discussion of a potential hike in the funds rate, with June now in play based on released minutes. However, the futures market assigns only a 26% probability of a hike in June and just a 53% probability for July.
  • The yield curve saw a slight upward shift as rates rose across all maturities. The short end of the curve rose more than the longer end as expectations rose moderately for a Fed rate hike. The intermediate to long end remains anchored by low foreign bond yields. The three-year Treasury saw the largest move, up 16 basis points (bps), while most yields in the three-month to seven-year increased 10 to 14 bps. The 10-year closed with a moderate increase, yielding 1.84%.
  • High-yield bond spreads narrowed from 6.08% to 5.81%; higher energy prices and views of an improving economy provided incentive to increase high-yield exposure. Inflows into mutual funds and ETFs were strong.
  • Oil prices again moved higher, finishing the week at $47.75 versus $44.66. Despite rising inventories, supply disruptions in Canada, Nigeria, Latin American and Africa were in focus. Rig counts dropped by two in the latest week to 404. The previous low was 488 in 1999.
  • Gold prices finished the period at $1,252, declining by $37 an ounce, or 2.9%. Prices have declined for three consecutive weeks, despite holdings in the SPDR Gold ETF rising to their highest levels since November 2013. Rising interest rates would raise borrowing costs, and a rising dollar make holding gold more expensive.
  • Friday was the one year anniversary of the S&P 500’s all-time high of 2,134.72 on May 20, 2015. At a closing level of 2,052, this represents the first time throughout the current recovery the S&P 500 went an entire year without hitting a new 52-week high. There have only been 10 periods over the last 50 years the market didn’t register a new high over the one year period, two being consolidations and the others inside bear markets.

2016.05.23-ETChart

Data as of 5/20/16 • Source: Bloomberg

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

 

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