Market Insights: June 9, 2014
Economic Outlook: The big wheels keep on turning…
- The wheels of this economic recovery continue to turn. Manufacturing surveys highlight a continued expansion in that sector. The PMI Manufacturing Index posted at 56.4 for May, up from 55.4 last month. The ISM Manufacturing Index showed the same trend, coming in at 55.4 for May, up from 54.9 in June.
- Construction Spending lagged these manufacturing surveys slightly, rising a more modest 0.2% in April, but is +8.6% year-over-year [Dept of Commerce].
- Factory Orders rose higher than anticipated with an increase of +0.7% for April, continuing their recovery from a severe winter [Dept of Commerce].
- Motor Vehicle Sales increased 4.4% in May to a 16.8 million annual rate. This represents a new recovery high.
- We needed new jobs creation last week of at least 114,000 to bring us to the point where we can say that every job lost in the Great Recession of 2008-9 has been regained. We got a new jobs number on Friday of 179,000. Friday’s number was a bit below the anticipated number of above 200,000, and shows that month-to-month fluctuations are normal. Nonetheless, while the recovery has been slower than historical averages, we have finally surpassed an important milestone this past week.
- Some clients have been surprised about our optimism for continued economic growth. GDP growth is not robust, that is for sure. However, total employment has continued to slowly accelerate with employment growing in 2014 so far greater than it did all of last year. May represents a pause in the recent month’s trend showing job growth averaging over 200,000. This is a very important metric to continue to watch.
- It is important to look beyond the raw unemployment percentage and focus on total employment. If the unemployment rate goes up because more people are coming back into the job market, that is not all bad. People are coming back in for a reason: optimism about the prospects for actually securing a job.
- The ECB announced a package of measures on Thursday to provide further stimulus to the European economy and attempt to drive the value of the Euro lower. A lower Euro versus the dollar may dampen the competitiveness of U.S. produced exports in Europe. However, it is important to recognize that success in growing income in Europe will have a counter-balancing effect of increasing demand for goods across the board, including U.S. exports.
- European Union PMI Manufacturing Index slowed a bit in May, but remains in expansion mode with a 52.2 print.
- Some weak data points out of the European Union that likely contributed to the ECB’s decisions are the flash inflation measure showing only 0.5% year-over-year growth, unemployment rate still high at 11.7%, and PPI in negative territory at -1.2% year-over-year [Eurostat].
- There are some signs of strength in the European Union retail sector. Retail sales are up 2.4% year over year.
Equities Outlook: Sell in May and do what?
- Stepping back, we can reflect that this year started in the equity markets with fear that emerging markets weakness could turn into global contagion. The Crimean situation did not help. However, as we’ve moved through May, this fear factor in the markets seems to have dissipated.
- There were no huge moves in the equity market last week, but blue chip indexes continued their advance. Small Caps have rallied a bit as of late and the Russell 2000 is now only slightly negative for the year. This closes some of the divergence gap that worries market technicians.
- “Sell in May and Go Away” rule has not worked so far this year.
- Annual earnings estimates for 2014 and 2015 on S&P 500 and S&P 400 companies have actually increased during the first 5 months of this year, reversing a trend of tightening that we saw in 2013. This suggests that analysts are feeling more confident about revenue and earnings gains continuing, which would be positive for the equity markets.
- No real pop in European markets after the Draghi announcements on Thursday so it was mostly treated as expected news.
The Fed and Fixed Income Markets: Future inflation risks?
- The Ten-Year Treasury rebounded in yield last week. It had closed the previous week at a yield of 2.48%, and we commented that this appeared unusually low. Last week, the 10-year rebounded to close at 2.59%.
- Harvard University economist Martin Feldstein characterized current inflation last week on Bloomberg Radio: “we are already at a point where inflation is at their (the Fed’s) target”. Feldstein expressed concern that the Fed (and all Central Bankers) is historically slow to adjust to rising inflation pressures, though he gave Janet Yellen credit for saying the right things about anticipated Fed responses in speeches last week.
- Feldstein’s comments reiterate the importance for fixed income investors not to take undue duration risk in reaching for yield. That is a strategy that could backfire.
The Week Ahead:
- Small Business Optimism Index (NFIB)
- Retail Sales (Dept of Commerce)
- Consumer Sentiment (University of Michigan)