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Market Insights

Market Insights: June 2, 2014

Market Insights: June 2, 2014

Economic Outlook:  A recovery that appears intact…

  • Last week’s report on Durable Goods Orders beat expectations by increasing 0.8% in April. Durable Goods Orders now stand +7.0% year from a year ago, [Dept of Commerce].
  • There also appears to be growth in the service sector. The PMI Services Flash Index [Markit] moved up to 58.4 in May following a 54.2 reading last month.
  • Consumers seem to be buying into the economic news. The Conference Board’s Consumer Confidence Level is holding above the key level of 80, coming in at 83 in May, up from 81.7 in April.
  • The report on Personal Income continues to show steady growth, with a +0.3% gain in April, [BEA].
  • Ed Yardeni’s research did a deep dive into the 5 regional Fed business surveys (Dallas, Kansas City, New York, Philadelphia, Richmond) last week. They reported that the average of these is at the highest level since March of 2011.
  • Of note for our area of the country, the Dallas Fed survey reported some upward pressure on wages, likely the effect of the strong energy industry expansion.
  • The 4 week moving average of Initial Jobless Claims is down to 311,500. This is a new recovery low for the period beginning in the spring of 2009, [Dept of Labor].
  • The S&P Case Shiller Home Price Index moved up +1.2% in March, perhaps signaling that some of the recent concerns about the pause in the housing recovery might be overblown.
  • Internationally, retail sales in Japan slumped in April, likely the result of spending being pulled forward in March ahead of the expected sales tax increase. Other data out of Japan missed expectations as well, with Household Spending dropping -4.6% in April and Industrial Production contracting -2.5%, [Japanese Ministry of Economy].

Equities Outlook:  The technical backdrop and earnings…

  • It was another good week for equities, the S&P 500 was just over 1.0% and now up around 4.5% for the year. Perhaps more importantly, after trailing badly, smaller stocks have enjoyed a comeback rally in the past month. If this were not happening, it might be cause for concern.
  • From a technical standpoint the market’s move up in the past month is characterized by increasing market breadth and this lends further credibility to the continued bullish outlook. While it is not fair to say that the technical evidence is 100% bullish, we believe that it is wise to continue to give the benefit of the doubt to the direction of the current market.
  • The earnings reporting by companies for the first quarter is virtually 100% complete at this point. Two-thirds of companies have exceeded analyst’s earnings estimates by an average margin of 5.0%. This is an improvement over the similar comparison in the 4th quarter of 2013.

The Fed and Fixed Income Markets:  How low can it go?

  • The Ten-Year Treasury slipped further in yield last week.  It had closed the previous week at a yield of 2.52%, and closed last week at 2.48%, below the important 2.5% benchmark.
  • Our surprisingly low U.S. interest rates may be the beneficiary of comments by the ECB’s Mario Draghi that authorities in Europe will do whatever it takes to drive the value of the Euro lower. This makes U.S. dollar-based investments, including bonds, more attractive to foreign buyers and perhaps has stimulated Treasury purchases.

The Week Ahead:

Monday

  • US, ISM Mfg Index (ISM)

Tuesday

  • US, Factory Orders (Census, Dept of Commerce)

Wednesday

  • US, ADP Employment (ADP)

Thursday

  • EU, ECB Announcement

Friday

  • Employment Situation Report (BLS)