Economic Outlook – Not Too Hot, Not Too Cold, Just Right.
- The economic backdrop is encouraging. The ISM survey for the service sector edged higher in April, with both Business Activity and New Orders moving higher. Friday’s employment report was positive, with the unemployment rate easing down to 5.4% and 223,000 new jobs were created.
- The unemployment rate eased down without any contribution by the Labor Participation Rate. The Labor Participation Rate has been holding steady at 62.8%. Wage growth remains muted increasing just 0.1%. [BLS]
- This is a jobs report the stock market can like – not to hot, not too cold, just right… The tepid wage growth signals less inflation, so there is less pressure on the Fed to make any quick moves in regards to rate hikes.
- Some of the manufacturing data was weaker in April, but the ISM Services Index was very strong in April at 57.8 [ISM].
- On the negative side, the trade deficit came in higher than expected at -$51.4 billion.
- Data posting from the Euro-zone has been volatile of late, but generally on the positive side.
- Growth in the Euro-zone was revised to slightly stronger than originally reported. Thanks to an upward revision to the flash service sector PMI (now at 54.1) the final composite output index was raised 0.4 points to 53.9, just a tick below its final March level.
- This revision to the service sector PMI reflected stronger new order inflows, which follows on strong numbers in March and combines with a continuing increase in backlogs.
- Regionally, there were some surprises in the scorecard. The strongest performing state was Ireland (composite output index 59.7), ahead of Spain (59.1 and a 101-month high) and Germany (54.1). Italy (53.9) also saw a multi-month high but France (50.6) registered a 3-month low.
Equities Outlook: Rally in the UK?
- We saw a minor sell-off mid-week last week, corresponding to the rapid rise in rates of German bond yields, but this weekly loss turned to gain on Friday after a good domestic jobs report and UK election results provided encouragement to equity investors.
- Further support for the stock market attributes to the fact that 2015 earnings projections for the S&P 500 have stabilized, and even ticked up a bit. Some of this reversal may be attributable to higher oil prices, but regardless of the factors contributing, the direction is what counts.
- Janet Yellen ventured into territory made famous by Alan Greenspan in 1996 with his “irrational exuberance” remarks; she commented that current valuations in the equity market appear to her a bit stretched. However, given the Fed’s own policy of keeping rates at rock bottom levels that may not compensate for risk, dividend-paying equities with growth attributes look like one of the few games that makes sense.
- The Conservative Tory Party garnered better than expected election results last week, gaining a majority in the UK Parliament. The stock market seemed to like the outcome and the FTSE rallied over 2% on Friday and the pound strengthened materially. Of greater ongoing importance for markets are the differences between the Tory Party’s generally market-friendly policies and those of the opposition Labour and Liberal Democrat parties.
- The election outcome should reduce investor uncertainty; this coupled with the positive UK economic prospects, should strengthen the outlook for UK equities, going forward.
Fixed Income Markets: Predictions Abound.
- There was a bump in yield on the Ten-Year Treasury Note last week, as the yield on the Ten-Year closed at 2.13%, up slightly from the previous week’s 2.11% yield.
- The general upturn in bond yields over the past 3 weeks have been felt across all developed nations, not just the U.S. — including Australia, Canada, Germany, Italy, Japan, Spain, and the UK.
- Interesting predictions regarding rates abound. Strategas Research is calling for an initial rate hike in the Funds rate at the September Fed meeting.
- David Rosenberg of Gluskin Shelf predicts that 2016 will be the year of “two, three, four” – 2% on the Fed Funds rate, 3% on the 10-year bond, and 4% on the long bond. That would be a significant move from where we are today.
The Week Ahead
- U.S., NFIB Small Business Optimism
- U.S., Retail Sales (Census)
- EU, 1Q GDP (Eurostat)
- EU, Industrial Production (Eurostat)
- U.S., PPI (BLS)
- U.S., Industrial Production (Federal Reserve)
- U.S., U of Michigan Consumer Sentiment