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Market Insights

Market Insights: October 6,2014

Market Insights: October 6,2014
Economic Outlook – A Global Mixed Bag

  • Pretty much the same story as in recent weeks. The U.S. economic data is positive across the board. The numbers from foreign economies are significantly weaker by comparison.
  • U.S. Personal Income and Consumer Spending increased 0.3% and 0.5% respectively, in the month of August (Department of Commerce). Moreover, the year-over-year measures for both are healthy, with Personal Income at +4.3% and Consumer Spending at +4.1%.
  • Despite these strong readings, the Fed’s preferred measure of inflation, the PCE Index, was unchanged in August, and is up a relatively low 1.5% year-over-year (Department of Commerce). No latent inflation pressure yet showing.
  • Regional Manufacturing surveys around the U.S. continue to be strong. The most recent Dallas Fed Manufacturing Survey showed a 10.8 reading for the Business Activity Index and a 17.6 reading for the Production Index. These are both improvements from last month (Federal Reserve Bank of Dallas). Of interest — New orders, capacity utilization, and perceptions of business conditions were among the strongest components
  • Despite the anecdotal headlines about frenetic bidding wars above asking prices for new homes, the statistical measures for Home Price Growth is moderating. The S&P Case-Shiller Home Price Index was up a modest +0.6% in July, but still increased a respectable 6.7% for the trailing twelve month period.
  • The Conference Board’s Consumer Confidence reading unexpectedly reflected a dip to 86 from its prior 93.4 reading. This data point might be an outlier, and possibly reflects a myriad of concerns including Middle East turmoil, Ebola, etc. We will watch this reading evolve to see if a pattern of weakness develops.
  •  Meanwhile, the PMI Manufacturing posted another positive result, with a 57.5 reading for September (Markit). The PMI Services Index came in even better at 58.9. ISM’s Manufacturing Gauge also showed good news as well with a 56.6 reading.
  • Initial Jobless Claims came in at one of the lowest levels in a while, dropping down to 287,000 this week. We had a pretty good employment report Friday morning: Non-Farm Payrolls increase 248,000, and the Unemployment Rate dropped below 6.0 to 5.9% (BLS).
  • European Union Economic Sentiment dipped again in September, largely attributable to a weaker consumer sector (European Commission). The actual reading came in at 99.9, and just for reference, the long run average is 100, so this is a reading slightly below that level.
  • On a regional basis, Germany is at 103.8 (probably reflecting its position as strongest Euro-zone economy) and Spain is at 104 (things seem to be improving slightly here, though they are climbing out of a deep hole). France, on the other hand, is much lower at 95.3.
  • The data out of Germany has been up and down, but recent Retail Sales in the country have come in surprisingly strong, with a 2.5% increase in August (Federal Statistical Office)
  • European Union Inflation remains in Draghi’s “danger zone”, up just 0.3% year over year through September (Eurostat). Continued monetary stimulus is likely.
  • To no one’s surprise the ECB in its announcement last week, left key interest rates unchanged. Accordingly, the benchmark rate stays at the record low of 0.05 percent to which it was cut just last month while the rates on the deposit and marginal lending facilities remain at minus 0.2 percent and 0.3 percent respectively.

Equities Outlook: Consolidation?

  • The past two weeks have mostly been poor for equities and the third quarter generally finished modestly lower for most equity indexes.
  • Smaller capitalization stocks (Russell 2000) are now down close to 5% for the year. The MSCI EAFE Index (foreign developed economy stocks) is down almost 4% for the year.
  • The MSCI Emerging Markets has remained in positive territory, but just barely. It is up over 1% on a year-to-date basis.
  • The S&P 500 Index also continues to show a positive year-to-date reading at +6.93% through Thursday’s close. This is despite a slight decline for the third quarter.
  • We’ve written about the positive fundamentals and reasonable equity valuations. There is not any single factor that seems responsible for setting off this sell-off, a few negative developments probably represent the trigger: Ebola scare, ISIS, poor data out of Europe and Japan, slower growth in China, and the pending end of Quantitative Easing here in the US.

Fixed Income Markets: Be careful in reaching for yield…

  • The interest rate on the Ten-year U.S. Treasury Note finished at 2.44% on Friday. This is a bit of a recovery from the previous levels of the past few weeks below 2.40%.
  • We’ve written a bit in recent weeks about the risks in sectors where investors are reaching for yield. High yield bonds have been whacked a little bit over the past few months, the Barclays High Yield Index is now yielding 6.13%, after sitting as low as 4.83% at the end of June

The Week Ahead

Wednesday

  •  FOMC Minutes release

Friday

  • Treasury Budget data release