Federal Reserve/Economic Reports

  • Federal Reserve board members have increased their rate hike rhetoric, promoting the idea of a likely rate at one of their upcoming meetings. The weak payrolls report and the upcoming Brexit vote diminished the likelihood of a rate hike in June (now a 4% probability), with July still unlikely (31% probability).
  • The Fed’s latest Beige Book, surveying economic activity between April 8 and May 23, showed modest growth across most districts. Consumer spending rose modestly, with increasing preference for online shopping. Nonfinancial (technology, professional services and healthcare) showed growth, housing and construction improved, business loan demand and credit quality improved, and labor markets tightened.
  • Nonfarm payrolls rose by just 38,000, well below estimates looking for 158,000. It was the fewest since September 2010. Adding to the weak report, March and April levels were revised down by 59,000. The unemployment rate fell to 4.7% as almost a half-million people left the labor force. Average hourly earnings rose 0.2%, keeping the year-over-year change at 2.5%, while the average workweek was 34.4 hours, the lowest level since February 2014. The labor force participation rate fell back to 62.6%.
  • The ISM Non-Manufacturing Index (NMI) fell 2.8 points in May to 52.9 versus an expected 55.5, its biggest decline since September 2013 and lowest level since February 2014, as services activity declined. Survey respondents reflected broad-based growth but at a slowing pace relative to previous months. The Prices Index increased 2.2 points to 55.6, its highest level since September 2014, as input prices increased.
  • The ISM Manufacturing Index rose in May by 0.5 points to 51.3, above consensus looking for a 0.5-point decline. A pickup in supplier deliveries caused the increase, but the other components showed weaker growth or contraction. Two-thirds of the ISM manufacturing industries reported growth, matching its highest share in a year. The ISM Price Index rose 4.5 points to 63.5, its highest level since June 2011.
  • Factory orders rose 1.9% in April, matching consensus, while March was revised up by 0.6% to 1.7%. Nondurable goods orders rose 0.4%, its second straight gain, caused by higher prices for oil and coal products. An increase in aircraft orders increased durable goods 3.4%; excluding transportation, durable goods orders rose 0.5%.
  • Light vehicle sales rose 0.2% in May to a 17.37 million unit annual rate, indicating continued strength, and light truck sales reached near a record high, 58.7%, with imported light trucks rising 12%, the most in seven months
  • Personal consumption expenditures (PCE) increased 1% in April, the most since August 2009 and above the expectations of a 0.7% increase. A 2.3% improvement in durable goods spending, mostly autos, led the increase. Services spending rose 0.6%, the most in a year. Personal income increased 0.4%, while the personal saving rate fell to 5.4% from 5.9%. Year over year, Core PCE prices rose 1.6%, below the Fed’s longer-term target of 2%.
  • The Conference Board’s Consumer Confidence Index fell 2.1 points in May, its third decline in the past four months, to 92.6. Expectations were for a 1.8-point gain. The present situation index fell 4.2 points, while expectations fell 0.7 points to 79.0. Spending plans for the next six months mostly improved, led by plans to buy a car or home.
  • The S&P/Case-Shiller U.S. National Home Price Index rose a moderate 0.1% in March, up for the 50th consecutive month, although by the least amount since May 2014. The 10-city and 20-city composite indexes rose 0.8% and 0.9%, respectively. Gains in home prices improve household wealth and are positive for consumer spending growth.
  • New home sales rose 16.6% in April, the largest increase since January 1992, to a 619,000 unit annual rate, the highest level since January 2008. The consensus was for a 2.5% increase. The previous three months were revised up by a total of 44,000 units. Year over year, sales are up 23.8%, as momentum has improved. The median sales prices rose 5.2% from a year ago.
  • Existing home sales rose 1.7% in April to a 5.45 million unit annual rate. It was the fourth increase in the past five months and near the highest level since the spring of 2007. Condo sales increased 10.3%, and single-family sales rose a modest 0.6%. Sales are up 6% year over year, and the median existing home price rose 6.3%.
  • Durable goods orders rose an above-consensus 3.4% in April, up in three of the past four months, led by a rebound in civilian aircraft orders. March was revised up to 1.9% from 0.8%. Excluding transportation, orders rose a much smaller 0.4%. Nondefense capital goods orders ex-aircraft – or core business equipment orders – fell 0.8%, the third straight decline, as capex demand continues to struggle.

Financial Markets

  • Despite a modest pullback on Friday caused by the weak payroll report, the equity markets generated attractive total returns over the latest two-week period. The small cap Russell 2000 rallied 4.7%, the NASDAQ Composite rose 3.7%, and the S&P 500 gained 2.4%.
  • International markets were also positive, with the developed market EAFE Index up 2.4% and the Emerging Markets Index up a robust 4.1%. A delayed rate hike is favorable to the emerging markets, sensitive to the weaker dollar.
  • The dollar rose by 0.6% over most of the two-week period on increased Fed discussion on raising rates. However, Friday’s weak payroll report dashed all thoughts of the Fed raising rates in June, causing the dollar to fall by just under 2% from the midweek peak. The dollar index finished the period down 1.4%. The British pound sterling is showing weakness relative to the euro, as polls are showing the U.K.’s increased preference to leave the European Union, despite concerns for economic consequences. The pound is down 3% from the highs on May 25.
  • Gold prices also reversed course on Friday on the weaker dollar. Spot prices decreased as much as $47 to $1,205 per ounce from the last report’s closing levels before rallying $33 on Friday to finish the period at $1,244.
  • The yield curve experienced a slight downward shift as rates fell across all maturities. The short end of the curve fell moderately, as expectations for a Fed rate hike declined. The intermediate to long end fell 10 to 15 basis points. The German 10-year government bond reached a new low of just 0.068%, testing lows of 0.049% reached in 2015.
  • High-yield bond spreads continued to narrow as economic conditions improved and oil prices recovered. Spreads over Treasuries fell 5.81% to 5.63% before Friday’s risk off selloff to 5.78%. Inflows into high-yield funds over the most recent week offset some of the outflows during the previous week.
  • Oil prices continued to move higher, rallying from $47.75 to over $50 before a modest selloff to finish the period at $48.62. Despite the Vienna OPEC meeting ending with no agreement on production targets, U.S. storage and production levels continue to decline, providing price support.

2016.06.06-ETChart
Data as of 6/3/16 • Source: Bloomberg
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.

 

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