Monthly Archives: May 2014

Market Insights 5/30/2014 — Month End

Stocks End Week With Flat Finish

The U.S. equity markets closed a lackluster trading session in mixed territory as stocks seemed to lack conviction, wavering on either side of the “opening mark” throughout the day. Treasuries were nearly unchanged following domestic economic data that showed a rise in personal income, an unexpected decline in personal spending and a lower-than-expected read on consumer sentiment, while a separate release indicated growth in Midwest manufacturing activity continued to exhibit expansion. Meanwhile, crude oil prices, gold and the U.S. dollar were all lower.

The Dow Jones Industrial Average gained 18 points (0.1%) to 16,717

The S&P 500 Index moved 4 points (0.2%) higher to 1,924

The Nasdaq Composite decreased 5 points (0.1%) to 4,243

In moderate volume, 912 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.87 to $102.71 per barrel, wholesale gasoline was $0.03 lower at $2.97 per gallon

The Bloomberg gold spot price lost $4.37 to $1,251.20 per ounce

Markets were higher on the week, as the DJIA gained 0.7%, the S&P 500 Index added 1.2%, and the Nasdaq Composite Index increased 1.4%.

Mixed bag of economic data to round out week

Personal income rose 0.3% month-over-month in April, matching what economists had projected, and March’s 0.5% rise was unrevised. However, personal spending fell by 0.1% m/m in April, short of expectations for a 0.2% rise, while March’s 0.9% gain was revised to a 1.0% increase. The April savings rate as a percentage of disposable income rose to 4.0%, from March’s downwardly revised 3.6% rate.

The final University of Michigan Consumer Sentiment Index was revised slightly less favorably than expected to 81.9 for May from the preliminary report of 81.8, and compared to the 82.5 revision that economists surveyed by Bloomberg had estimated. April’s figure was a solid 84.1, which was the highest since July 2013.

The weakness came from current conditions component, which declined 4.2 points to 94.5, while the outlook component ticked 1.0 point lower to 73.7. On inflation, the 1-year expectation ticked higher to 3.3%, from April’s 3.2% figure, while the 5-year inflation outlook was adjusted lower to 2.8%, following the 2.9% posted last month.

Rounding out the week’s economic calendar, the Chicago Purchasing Managers Index showed growth in Midwest activity continued to show expansion, posting a better-than-expected reading of 65.5 for May, above expectations of a level of 61.0, after rising to an unrevised 63.0 in April, with a reading above 50 depicting growth.

Treasuries were nearly unchanged, with the yields on the 2-year note and the 30-year bond flat at 0.37% and 3.32%, respectively, while the yield on the10-year note was 1 basis point higher at 2.47%.

Markets higher during holiday-shortened week

With the shortened holiday week, the U.S. equity markets were able to finish the four-day period higher, with the S&P 500 venturing into record-high territory amid some global bond market developments and mixed, but mostly positive, economic reports. Stocks paused mid-week as traders may have been exercising some caution in response to global bond markets rallying, fueled by expectations of further policy easing by global central banks. By weeks end the march continued higher as May was left behind and all thoughts move to June.

U.S. economic data and the ECB in focus

Next week’s U.S. economic calendar will be full of headline data for traders to consider, including the ISM Manufacturing Index, the ISM Non-Manufacturing Index, the Federal Reserve’s Beige Book, the ADP Employment Change, and nonfarm payrolls. Other releases will include construction spending, factory orders, vehicle sales, the trade balance, nonfarm productivity and unit labor costs, as well as consumer credit.

It’s important to note, while we have recently lowered our long-term yield expectations for 2014, we still think the trend for yields is higher as long as the economy continues to improve. However, we feel long-term bond yields will peak at lower levels than years past due to changes in demographic trends that could lower the potential growth rate of the economy and specifically the slow pace of the growth of the labor force.

At WT Wealth Management we currently carry a nominal treasury short in the Tactical Allocation Band in order to stabilize portfolios from a unexpected rise in interest rates. The percentage of the hedge is in accordance with the percentage of assets within the portfolio at risk of an upward interest rate movement. We expect to increase our fixed income hedges/shorts heading into the fall when traders attention will turn to 2015 fiscal policy and a subsequent higher rate environment.

Europe mixed, Asia lower

The European equity markets finished mixed in afternoon action following the mixed bag of reports out of the U.S., and amid sluggish economic news in the region. Germany reported a surprising decline in retail sales for April, while inflation data in Italy showed prices at both the wholesale and consumer levels fell mostly inline with forecasts.

Stocks in Asia finished mostly lower following yesterday’s report on economic output in the U.S. coupled with a slew of disappointing data out of Japan. The island nation’s industrial production and household spending fell more than forecasts and consumer price inflation soared to a 23-year high. So far the Prime Minister Shinzo Abe’s “three arrow” plan to revive the Japanese economy has delivered disappointing results. A sales tax increase on April 1 added to the country’s woes, and the stock market has stalled. While Japanese stocks may have a short-term rebound if the BoJ increases the size of its quantitative easing (QE) program as expected, our outlook on Japan is dimming.

Markets globally will be focused on what type of action the European Central Bank (ECB) takes at its monthly policy meeting on Thursday. Many analysts feel, the ECB has “serious concerns” about the level of the euro in the context of low inflation, and has signaled it is ready to act at the June meeting. Most believe the action is likely to be more symbolic in nature than revolutionary; and there is the risk the market is disappointed. However, we are still optimistic the euro zone’s recovery improves and are encouraged by the apparent turn around in lending a good leading indicator.

Market Insights 5/29/2014

Markets Move Higher Following Yesterday’s Pause

After a brief pause yesterday, the U.S. equity markets got back to their recent winning ways and closed the trading session higher. Stocks were able to push into positive ground as a better-than-expected read on weekly jobless claims paired with a slight gain in pending home sales may have helped to overshadow the larger-than-expected downward revision to 1Q GDP, which showed the economy contracted for the first time in three years. Treasuries were lower as yields turned higher after losing early ground. By days end, gold was lower, crude oil prices were higher and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average gained 66 points (0.4%) to 16,699

The S&P 500 Index moved 10 points (0.5%) higher to 1,920

The Nasdaq Composite added 23 points (0.5%) to 4,248

In moderately light volume, 544 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.86 to $103.62 per barrel, wholesale gasoline was $0.01 higher at $3.00 per gallon

The Bloomberg gold spot price declined $1.74 to $1,256.40 per ounce

GDP revised lower, claims decline, pending home sales show modest gain

The second look –of three– at 1Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of contraction of 1.0%, down from the 0.1% expansion reported in the first report, and below the 0.5% decline that was forecasted by economists surveyed by Bloomberg. However, personal consumption came in above forecasts, rising 3.1% from the 3.0% previously reported, following the 3.3% increase recorded in 4Q. This dramatic contraction in the economy was brought upon by the wicked winter weather that drove most American out of the malls into their homes

On inflation, the GDP Price Index was unchanged from its earlier report at a 1.3% rise, compared to the 1.6% advance seen in 4Q, which was the increase that economists anticipated, while the core PCE Index, which excludes food and energy, rose 1.2%, above expectations of a 1.1% gain, and following the 1.3% growth in 4Q.

Most economists see the U.S. economy picking up steam off the weak first quarter, which should help to boost corporate profitability and ultimately stock prices. The likelihood of a near-term correction is slightly elevated as we are in the heart of a traditionally dangerous time in the calendar for stocks (both the typically-weak May through October and the midterm election periods). But there is little to indicate that an economic downturn is on the horizon, which leaves us in the optimistic camp believing that the bull market is not winding down.

In additional to these risks, there are others as well. The retreat in the 10-year Treasury yield is high on that list, with the yield recently dipping below 2.5% again. With the economy improving and some signs of inflation picking up we would traditionally expect yields to move higher—and we still believe that will ultimately occur. At this point, we don’t believe the bond market is signaling a serious economic problem. We are over-weighted large caps in most portfolios and favor defensive sectors like Staples, Utilities and Healthcare in the Strategic Allocation Timeband of WT Wealth Management portfolios. In the Tactical Allocation TimeBand we are continuing to allocate to Materials, Industrials and Energy sectors which are due to benefit from short-term economic expansion.

Weekly initial jobless claims fell by 27,000 to 300,000 last week, below the 318,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 1,000 to 327,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 11,250 to 311,500, while continuing claims decreased by 17,000 to 2,648,000, south of the forecast of economists, which called for a level of 2,650,000.

Pending home sales rose 0.4% month-over-month in April versus the projected 1.0% rise that economists surveyed by Bloomberg had forecasted, and following the unrevised 3.4% increase registered in March. Compared to last year, sales were down 9.4% last month following March’s upwardly revised 7.5% decrease. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which notched its first increase in four months by posting a rise of 1.3% during April.

Treasuries turned lower with the yields on the 2-year and 10-year notes increasing 1 basis point to 0.38% and 2.46%, respectively, while the yield the 30-year bond added 2 bps to 3.32%.

Tomorrow, the U.S. economic calendar will offer reports on personal income, anticipated to increase 0.3% m/m in April, and personal spending, expected to have grown 0.2% m/m. Also on tap tomorrow, the Chicago Purchasing Manager Index is forecasted to tick lower in May, to a level of 61.0 from the 63.0 posted in April, with a reading above 50 depicting growth. Rounding out the day will be the release of the final University of Michigan Consumer Sentiment Index for May, with a reading of 82.5 expected, a slight increase from the preliminary report level of 81.8.

Europe and Asia mixed

The European equity markets finished mixed, as investors digested the mixed U.S. economic reports, and amid lower volume with some markets in the region closed for a holiday. However, U.K. stocks were higher for a third day with the FTSE 100 trading near its highest level in nearly 15 years. Economic news in the region was light, with the lone item of note showing that the final reading of Spain’s 1Q GDP remained at the 0.4% growth posted previously, as expected.

Stocks in Asia finished mixed amid a report that showed Japan’s retail sales declined 13.7% in April, the fastest pace in 14 years, and below economists’ forecasts, courtesy of the consumption-tax increase instituted in April that has depressed consumer spending. In other regional economic news, South Korea released a report that showed the nation’s current account surplus narrowed.

Market Insights 5/28/2014

Equities Stall as Yields Drop

Taking a pause from their recent four-day rally, the U.S. equity markets closed the trading session in negative territory as investors may have been exercising some caution in response to the continued rally in global bond markets, fueled on speculation of further central bank easing. Treasuries gained solid ground, likely boosted by the unwinding of failed bets on rising yields, while a light economic docket showed that weekly mortgage applications declined. Gold and crude oil prices were lower, while the U.S. dollar was higher.

The Dow Jones Industrial Average declined 42 points (0.3%) to 16,633

The S&P 500 Index moved 2 points (0.1%) lower to 1,910

The Nasdaq Composite lost 12 points (0.3%) to 4,225

In moderate volume, 634 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.39 to $102.72 per barrel, wholesale gasoline was $0.01 higher at $2.99 per gallon

The Bloomberg gold spot price declined $5.71 to $1,259.23 per ounce

Mortgage applications decline

The MBA Mortgage Application Index declined 1.2% last week, after the index gained 0.9% in the previous week. The decrease came as a 1.4% drop for the Refinance Index was accompanied by a 1.1% decline for the Purchase Index. However, the average 30-year mortgage rate fell 2 basis points to 4.31%.

Treasuries were solidly higher, with the yield on the 2-year note declining 2 bps to 0.37%, the yield on the 10-year note dropping 8 bps to 2.44%, and the 30-year bond rate falling 7 bps to 3.29%. Global bond markets have rallied as of late fueled by expectations of further policy easing by global central banks and some likely covering of short positions as bets on higher yields have not come to fruition.

Why Has the Bond Market Rallied This Year? The main factor holding down yields has been the softness of the economy, including a lackluster housing market and weak income growth. As the Fed exits quantitative easing, the hope is that the private sector will pick up where the Fed leaves off in terms of credit creation. But the pace of overall credit growth has been slipping since the start of tapering. If the Fed continues to taper its bond purchases —which it clearly says it will— then the banks will need to step up their lending to keep this indicator growing at a pace associated with a stronger economy.

The jury is still out and she continues to believe economic growth will pick up in the second half of the year, but that’s not necessarily the message coming from the monetary indicators or the markets. And the bond market has outsmarted the consensus expectations so far this year. We have lowered our expectations for rising long-term rates this year, and suggest long-term investors should not hold out for 3.5% or higher on the 10-year by years end.

Tomorrow, the U.S. economic calendar will offer the second look at 1Q GDP, forecasted to show a 0.5% quarter-over-quarter annualized rate of contraction, down from the 0.1% expansion reported in the first revision. Additional releases include weekly initial jobless claims, forecasted to decrease to a level of 318,000 from the prior week’s 326,000 figure, and pending home sales, with economists expecting the pipeline of existing home sales to increase 1.0% m/m during April, following the 3.4% increase in March.

Europe mostly flat, Asia higher

The European equity markets finished near the unchanged mark as a plethora of economic reports in the region painted a mixed picture that failed to spark much conviction. French consumer spending unexpectedly declined in April, while the German unemployment change surprisingly increased and a read on Eurozone economic confidence improved more than anticipated for this month. Moreover, Switzerland’s 1Q GDP growth came in at a slightly smaller pace than anticipated but was an acceleration from the previous period, while Eurozone money supply rose at a smaller rate than expected for April.

Stocks in Asia finished mostly higher following the gains in the U.S. markets yesterday on a plethora of upbeat economic data, which buoyed optimism regarding growth of the world’s largest economy. In light regional economic news, China reported that its industrial profits slowed to a 10.0% year-to-date y/y increase for April, from the 10.1% increase in March.

Market Insights 5/27/2014

Markets Move Higher

After the three-day Memorial Day weekend, U.S. equities finished higher, courtesy of a whole host of mostly positive economic reports. Durable goods orders for April unexpectedly increased while March’s figures were revised solidly higher, and home prices rose again, Consumer Confidence improved, and regional manufacturing data continued to be favorable. Treasuries finished slightly higher, while gold and crude oil prices were lower, and the U.S. dollar was flat.

The Dow Jones Industrial Average rose 69 points (0.4%) to 16,676

The S&P 500 Index moved 11 points (0.6%) higher to 1,912

The Nasdaq Composite increased 51 points (0.8%) to 4,237

In moderately light volume, 656 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.24 to $104.11 per barrel, wholesale gasoline was $0.03 lower at $2.98 per gallon

The Bloomberg gold spot price tumbled $26.49 to $1,266.42 per ounce

Durable goods orders mixed, while Consumer Confidence improves

Durable goods orders rose 0.8% month-over-month in April, compared to the 0.7% decrease expected by economists surveyed by Bloomberg, while March’s 2.6% gain was revised to a 3.6% rise. Ex-transportation, orders ticked 0.1% higher, versus the forecast of a flat reading, and March’s figure was revised higher to a 2.9% gain from an initial rise of 2.0%. However, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 1.2% m/m last month, compared to the 0.3% decline projected, but the 2.2% increase in March was revised to a 4.7% jump. Shipments of nondefense capital goods excluding aircraft, the figure used in calculating GDP, fell a larger than expected 0.4%, although the figure for March was upwardly revised to 2.1% from 1.0%.

The continued strength in business spending and M&A activity are signs that so-called “animal spirits” may be returning to the corporate boardroom as executives appear to be regaining confidence and looking to the future growth of their businesses instead of merely trying to survive until the storm clouds pass. In fact, the explosion of merger and acquisition activity, measured at 180 deals in the amount of $1.5 trillion in the 100 days ending May 15, exemplifies the improving corporate confidence. This fits with our theme for this year that corporate spending on equipment and technology will be a major driver of economic improvement, which is why we continue to rate the industrial at outperform.

The Consumer Confidence Index rose to 83.0 in May, from a downwardly revised 81.7 in April, matching economists’ expectations. The report came as both the component pertaining to expectations of business conditions and the current situation improved m/m. Moreover, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—improved to -18.2 from -19.8 last month.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 12.4% year-over-year in March, compared to the 11.8% increase that economists had expected. Moreover, m/m, home prices were higher by 1.2% on a seasonally adjusted basis for March, above forecasts calling for a 0.7% gain.

Treasuries finished slightly higher, as the yield on the 2-year note was nearly unchanged at 0.35%, the yield on the 10-year note declined 2 basis points to 2.51%, while the 30-year bond rate fell 4 bps to 3.36%.

In contrast to today’s economic docket, tomorrow’s domestic calendar will be very light and only provide a look at MBA Mortgage Applications.

Europe mostly higher, Asia mixed as U.S. data eyed

The European equity markets traded mostly higher with the U.K. markets returning from yesterday’s holiday and traders digesting the raft of favorable U.S. economic data, highlighted by the durable goods orders report, which showed some large upward revisions to the prior month’s figures. European stocks extended yesterday’s advance that was led by a rally in the Italian markets following some positive election results in the region over the weekend.

Italian Prime Minister Renzi found surprisingly strong support in the European Parliamentary elections, while sentiment was upbeat after a presidential election in Ukraine. In economic news, French consumer confidence remained unchanged as expected for May, while Switzerland’s trade surplus widened more than expected for April. Stocks in Asia finished mixed in a subdued session ahead of a plethora of data in the U.S., where markets were closed yesterday for the Memorial Day holiday. Economic news in the region was light as the only report of note showed a decline in South Korea’s consumer confidence for May.

Market Insights 5/23/2014

Housing Data Helps Equities Build on Gains

The U.S. equity markets extended their gains to three-straight sessions, as investors welcomed a stronger-than-expected read on domestic new home sales for April ahead of the three-day holiday weekend which will have all U.S. markets closed on Monday in observance of Memorial Day. In a shortened, pre-holiday bond market session, Treasuries were mostly higher despite the aforementioned housing report. Gold was lower, while crude oil prices and the U.S. dollar were higher.

The Dow Jones Industrial Average added 63 points (0.4%) to 16,606

The S&P 500 Index moved 8 points (0.4%) higher to 1,901

The Nasdaq Composite increased 31 points (0.8%) to 4,186

In moderately light volume, 554 million shares were traded on the NYSE, and 1.5 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.61 to $104.35 per barrel, wholesale gasoline was $0.02 higher at $3.01 per gallon

The Bloomberg gold spot price lost $1.05 to $1,293.05 per ounce

Markets were higher on the week, as the DJIA gained 0.7%, the S&P 500 Index added 1.2%, and the Nasdaq Composite Index increased 2.3%.

Please note: In observance of the Memorial Day holiday, all U.S. markets will be closed on Monday.

New home sales top expectations

New home sales rose 6.4% month-over-month in April, to an annual rate of 433,000 units, from March’s upwardly revised 407,000 unit pace. Economists surveyed by Bloomberg had expected an increase to a 425,000 rate for last month. Within the report, the median home price declined 1.3% y/y and 2.1% m/m to $275,800. The inventory of new homes was 19.3% higher y/y, and 0.5% above last month’s figure, at 192,000 units, representing a rate of 5.3 months of supply at the current sales pace, from 5.6 months in March and 4.3 in April 2013. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings.

Treasuries were mostly higher, with the yield on the 2-year note nearly unchanged at 0.34%, while the yield on the 10-year note declined 2 basis points to 2.53% and the 30-year bond rate dropped 3 bps to 3.39%.

Despite mixed data, stocks register gains, as Fed report calms rake hike concerns

The equity markets finished the week higher despite some mixed economic and earnings reports, courtesy of a midweek rally, aided by the Federal Reserve’s April meeting minutes which eased concerns about a sooner-than-expected rate hike. Earnings from the retail sector remained in focus, with 1Q earnings season mostly in the books, according to stats compiled by Bloomberg, about 75% of S&P 500 companies have recorded upside earnings surprises, while almost 53% have registered upside revenue surprises.

Meanwhile, the U.S. economic calendar offered some mixed figures, with jobless claims rising more than expected and existing home sales rising by a smaller amount than anticipated, while May manufacturing reports, headlined by Markit’s preliminary PMI Index, showed growth in the sector accelerated. Finally, M&A news continued to pour in, highlighted by Dow member AT&T Inc.’s (T $35) $48.5 billion agreement to acquire DIRECTV (DTV $84), and AstraZeneca PLC.’s. (AZN $73) rejection of Dow member Pfizer Inc.’s (PFE $29) sweetened $117 billion “final proposal to combine the two companies.”

We are seeing concrete signs that so-called “animal spirits” may be returning to the corporate boardroom. Executives appear to be regaining confidence and looking to the future growth of their businesses instead of merely trying to survive until the storm clouds pass. This is probably best exemplified by the explosion of merger and acquisition activity we’ve seen to this point in the year. While the M&A activity has been the most noticeable, we believe it’s another sign of improving corporate confidence and a willingness to use their cash. This fits with our theme for this year that corporate spending on equipment and technology will be a major driver of economic improvement, which is why we continue to rate the industrial and energy sectors as outperform.

In addition, with the economy improving and some signs of inflation picking up we would traditionally expect yields to move higher. So the retreat in the 10-year Treasury yield gives us pause as a potential warning sign, but at this point, we don’t believe the bond market is signaling a serious economic problem.

The economic expansion appears to be gathering momentum, which should feed on itself in a positively self-reinforcing cycle. The bond market is benefitting from the global search for yield, but we urge investors to be especially mindful of the risks. Low yields can be frustrating, but capital losses due to taking on more risk than appropriate can cause real damage to financial plans. As for stocks, they continue to exhibit no clear direction and the next decisive move in stocks could go either way, but we believe the ultimate trend is higher.

Europe and Asia mostly higher to close out the week

The European equity markets finished mostly higher with U.S. stocks extending gains following the upbeat new homes sales report. Stocks shrugged off a softer-than-expected read on German business sentiment. The German Ifo Business Climate Index, a survey of 7,000 executives, declined to 110.4 for May, from 111.2 in April, and compared to the 110.9 that economists had projected. In other German economic news, the nation’s 1Q GDP growth was unrevised at a 0.8% quarter-over-quarter pace, matching expectations, and compared to the 0.4% rate of expansion registered in 4Q. In other economic news, Italy reported that its retail sales fell much more than expected y/y in March and its hourly wages came in flat m/m in April. However, conviction and volume were subdued ahead of a three-day holiday weekend in the U.S., as well as some political uncertainty in the region. European Parliamentary elections began, with Italian leadership speculated to be vulnerable, while Ukraine is set to hold presidential elections over the weekend.

Stocks in Asia finished mostly higher to close out the week, showing some resiliency in the face of lingering geopolitical uncertainty. Indian equities finished the week at an all-time high, supported by continued economic optimism in the wake of last week’s leadership change. Elsewhere, media reports from China suggested the government will remove curbs on home purchases in some cities, while the Japanese yen continued to pullback from the more than three-month high registered earlier this week.

Market insights 5/22/2014

Markets Make Small Gains

The U.S. equity markets were able to extend recent gains as investors weighed some mixed domestic economic data on the heels of yesterday’s release of the April meeting minutes from the Federal Reserve, which suggested rates will likely remain low in the near future. Treasuries were mostly lower following domestic reports that showed weekly initial jobless claims rose more than expected and existing home sales missed forecasts, while Leading Indicators matched estimates and manufacturing data showed accelerated expansion.

The Dow Jones Industrial Average gained 10 points (0.1%) to 16,543

The S&P 500 Index moved 4 points (0.2%) higher to 1,893

The Nasdaq Composite added 23 points (0.6%) to 4,154

In moderate volume, 577 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.33 to $103.74 per barrel, wholesale gasoline was $0.02 higher at $3.01 per gallon

The Bloomberg gold spot price added $2.74 to $1,294.78 per ounce

Existing home sales rise to a smaller-than-expected rate, while jobless claims rise

Existing-home sales rose 1.3% month-over-month in April to a 4.65 million annual rate, and while it was the first increase in four months, it was below the Bloomberg estimate of an annual rate of 4.69 million. March’s figure was unrevised at a 4.59 million unit pace. The median existing-home price rose 5.2% from a year ago to $201,700. The increase in sales was driven by multi-family sales, up 7.3%, while single-family home sales gained a more modest 0.5% m/m. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.

Interestingly, some of the slowdown in sales in recent months was due to the lack of affordable supply, as inventories have been low, particularly at entry-level prices. Therefore the 16.8% month-over-month increase in supply was greeted positively, and resulted in a 5.9 month supply of homes at the current sales pace, up from 5.1 months in March. Lawrence Yun, chief economist at the National Association of Realtors (NAR) that releases the report, said “We’ll continue to see a balancing act between housing inventory and price growth, which remains stronger than normal simply because there have not been enough sellers in many areas. More inventory and increased new-home construction will help to foster healthy market conditions,” and added that “sales should generally trend upward from this point.”

Weekly initial jobless claims rose by 28,000 to 326,000 last week, above the 310,000 level that economists had expected, as the prior week’s figure was upwardly revised by 1,000 to 298,000. However, the four-week moving average, considered a smoother look at the trend in claims, dipped by 1,000 to 322,500, while continuing claims declined by 13,000 to 2,653,000, south of the forecast of economists, which called for a level of 2,675,000.

The preliminary Markit U.S. Manufacturing PMI Index rose to 56.2 in May from 55.4 in April, and compared to the 55.5 level that economists had expected, with a reading above 50 denoting expansion. The report was the strongest in three months, as solid rises in production—which posted the best m/m increase since February 2011—and output were complemented by further payroll growth. The release is independent and differs from the Institute for Supply Management’s (ISM) Manufacturing Index, as it has less historic value and Markit weights its index components differently.

Treasuries were mostly lower in afternoon action, with the yield on the 2-year note nearly unchanged at 0.34%, while the yield on the 10-year note increased 2 basis points to 2.55% and the 30-year bond rate added 1 bp to 3.42%.

Tomorrow, the U.S. economic calendar will offer more housing data in the form of new home sales, which are forecasted to rise 10.7% m/m during April to an annual rate of 425,000 units, coming off March’s 14.5% decline to a level of 384,000 units.

Europe mixed, Asia mostly higher

The European equity markets finished mixed, aided by a favorable read on Chinese manufacturing activity and as yesterday’s April meeting minutes from the U.S. Federal Reserve suggested rates will likely remain at low levels. Eurozone business activity data was mixed. The preliminary Eurozone Markit Composite PMI Index—a gauge of business activity in both the manufacturing and services sectors—dipped to 53.9 in May, matching expectations, from 54.0 in April. Within the report, growth in Germany’s services sector activity accelerated but manufacturing slowed, while French business activity unexpectedly fell back to a level depicting contraction. In other economic news, U.K. 1Q GDP grew at a 0.8% quarter-over-quarter pace, as expected, from the 0.7% expansion seen in 4Q. Meanwhile, Italian stocks were pressured amid political uncertainty ahead of this weekend’s European Parliamentary elections.

Stocks in Asia finished mostly to the upside following yesterday’s gains in the U.S. as the Federal Reserve’s April meeting minutes kept expectations of rising interest rates in check, while a relatively favorable read on Chinese manufacturing activity aided sentiment. The preliminary HSBC China Manufacturing PMI Index, rose to 49.7 in May, hitting a five-month high, from 48.1 in April, and compared to the 48.3 level that economists had projected. However, a reading below 50 denotes contraction. In Japan, the yen pulled back from its recent rally, while Markit’s preliminary Japan Manufacturing PMI Index improved to a level slightly below the demarcation point between expansion and contraction.

Market Insights 5/21/2014

Equities Rally

The U.S. equity markets surged back from yesterday’s sharp declines, as the Dow held onto triple-digit gains on the heels of the release of the minutes from the Federal Reserve’s most recent monetary policy meeting. Treasuries were mostly lower following the Fed minutes and as a separate report showed mortgage applications rose for a third-straight week.

Stocks started the day positive despite another round of mixed earnings from the retail sector. Target posted softer-than-expected earnings, but sales that exceeded the Street’s forecasts and Lowe’s Companies missed analysts’ quarterly expectations, while Tiffany & Co easily topped the Street’s expectations and raised its outlook.

The Dow Jones Industrial Average ascended 159 points (1.0%) to 16,533

The S&P 500 Index moved 15 points (0.8%) higher to 1,888

The Nasdaq Composite added 35 points (0.8%) to 4,132

In moderate volume, 586 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil gained $1.74 to $104.07 per barrel, wholesale gasoline was $0.03 higher at $2.99 per gallon

The Bloomberg gold spot price declined $2.53 to $1,291.84 per ounce

Fed discussed policy tools, while mortgage applications rise

The Federal Reserve released the April Federal Open Market Committee meeting minutes, in which it expectedly announced another $10.0 billion reduction to its monthly bond purchases to a pace of $45.0 billion. The report didn’t seem to offer much new guidance on when the Central Bank will begin to raise interest rates, but the report showed that there was a joint meeting between the FOMC and the Board of Governors of the Federal Reserve to discuss the eventual “normalization of the stance and conduct of monetary policy.”

In this joint meeting, they discussed the combination of policy tools that might be used but the report was quick to point out that this “did not imply that normalization would necessarily begin sometime soon.” Looking inside the regular minutes, participants indicated that their assessment of the economic outlook had not changed materially since the March meeting, as severe weather contributed to a sharp slowing in activity but recent indicators pointed to a rebound and suggested the economy had returned to a trajectory of moderate growth.

However, a number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in housing, further slowing in China, and an increase in geopolitical tensions regarding Russia and Ukraine.

At WT Wealth Management we feel that the main factor holding down yields has been the recent softness of the economy, including a lackluster housing market and weak income growth. However, as the Fed exits quantitative easing, the hope is that the private sector will pick up where the Fed leaves off in terms of credit creation. The pace of overall credit growth has been slipping since the start of tapering. If the Fed continues to taper its bond purchases—which it clearly says it will—then the banks will need to step up their lending to keep this indicator growing at a pace associated with a stronger economy.

The jury is still out and we continue to believe economic growth will pick up in the second half of the year, but that’s not necessarily the message coming from the monetary indicators or the markets. The bond market has outsmarted the consensus expectations so far this year. We have lowered our expectations for rising long-term rates this year, albeit slightly.

The MBA Mortgage Application Index rose 0.9% last week, after the index gained 3.6% in the previous week. The third-straight weekly increase came as a 3.8% rise for the Refinance Index more than offset a 2.8% decline for the Purchase Index.

Treasuries were lower, with the yield on the 2-year note nearly unchanged at 0.34%, while the yield on the 10-year note increased 2 basis points to 2.53% and the 30-year bond rate gained 3 bps to 3.41%.

The economic calendar tomorrow will be highlighted by existing-home sales, expected to rise 2.2% m/m in April to an annual rate of 4.69 million units, after falling 0.2% in March to 4.59 million units. Sales of existing homes reflect closings from contracts entered one-to-two months earlier. many see the weak link in the economy as housing. However, our belief is that the market was overheating a year ago, and there is a tendency to overshoot on the downside when coming off an inflating upside, potentially boding well for the future as the condition normalizes.

We believe the housing market is in pause mode after several positive years in a row but that the recovery will resume. History suggests we’re entering a potentially tough period for stocks, but trying to time the market has risks on both sides of the equation. Nervous investors may want to hold off allocating new money for a few months, but, as always, we suggest keeping a long-term outlook.

Europe higher, Asia mixed

The European equity markets finished higher, as traders digested an unchanged monetary policy decision from the Bank of Japan, and awaited the release of the minutes from the U.S. Federal Reserve’s April policy meeting. The Bank of England released the minutes from its monetary policy meeting earlier this month. The BoE voted unanimously to keep its benchmark interest rate at a record low of 0.50%, due to the need to see more evidence that slack in the economy is receding. The minutes showed “for some members the monetary policy decision was becoming more balanced,” suggesting that some may be moving toward voting for the first rate hike since July 2007. The British pound moved higher following the release. Some economic news in the region may have helped sentiment, with U.K. retail sales rising more than expected in April, while Eurozone consumer confidence remained negative but improved more than expected for this month.

Stocks in Asia finished mixed following the declines in the U.S. yesterday, while the Bank of Japan (BoJ) kept its monetary policy unchanged, as expected. The Yen gained some ground in the wake of the BoJ’s monetary policy decision. Prime Minister Shinzo Abe’s “three arrow” plan to revive the Japanese economy has delivered disappointing results. A sales tax increase on April 1 added to the country’s woes, and the stock market has stalled. While Japanese stocks may have a short-term rebound if the BoJ increases the size of its quantitative easing (QE) program as expected, our outlook on Japan is dimming. Also, Japan’s trade deficit narrowed sharply in April, with exports rising more than anticipated, but remained wider than economists had projected. In other economic news in the region, Australia reported a drop in the nation’s consumer confidence for May. We continue to be conservatively allocated to International and Emerging Markets in most portfolios.

Market Insights 5/20/2014

Disappointing Retail Earnings Stall Markets

Disappointing earnings reports out of the retail sector pressured U.S. equities in today’s session, with an empty economic calendar unable to provide any spark.

Dick’s Sporting Goods and Staples both fell short of analysts’ expectations and offered disappointing guidance, while Dow member Home Depot also missed the Street’s forecasts, but the home improvement retailer maintained its guidance.

Treasuries, gold, and crude oil prices were all higher, while the U.S. dollar finished nearly unchanged.

The Dow Jones Industrial Average tumbled 138 points (0.8%) to 16,374

The S&P 500 Index moved 12 points (0.7%) lower to 1,873

The Nasdaq Composite declined 29 points (0.7%) to 4,097

In moderate volume, 644million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.22 to $102.33 per barrel, wholesale gasoline was unchanged at $2.96 per gallon

The Bloomberg gold spot price rose $1.56 lower to $1,294.53 per ounce

Domestic economic calendar remains dormant

Treasuries finished higher, while the U.S. economic calendar was again void of any major releases, as the yield on the 2-year note fell 2 basis points to 0.34%, the yield on the 10-year note lost 3 bps to 2.51%, and the 30-year bond rate dipped 1 bp to 3.38%.

Tomorrow, the economic calendar will begin to heat up with the release of MBA mortgage applications and the afternoon release of the minutes from the April Federal Open Market Committee (FOMC) meeting. The Treasury markets have rallied in the last several weeks, resulting in a decline in yields again this year, this despite reduced asset purchases by the Fed. We have to ask ourselves…..

…..Why Has the Bond Market Rallied This Year? The the main factor holding down yields has been the general 1st quarter softness of the economy, while a un-inspired housing market, weak income growth, and slower credit growth may be helping to constrain yields.

We have lowered our expectations for rising long-term rates this year, and suggest long-term investors should not hold out for 3.5% or higher yields on the 10 year treasury until we some material changes in the economic outlook. With the 10 year treasury currently yielding 2.5% a 100 basis point move seems extreme considering the economic information we have in front of us today.

Europe mostly lower, but Asia higher

The European equity markets finished mostly lower amid the backdrop of economic growth concerns and political uncertainty ahead of this weekend’s European Parliament elections, which kept sentiment unchanged. In regional; news, German producer prices unexpectedly declined, U.K. consumer prices were hotter than expected, and Italian industrial orders rose much more than expected.

Stocks in Asia finished mostly to the upside, with stocks in Japan gaining ground ahead of tomorrow’s monetary policy decision from the Bank of Japan, which is widely expected to keep its policy unchanged. Prime Minister Shinzo Abe’s “three arrow” plan to revive the Japanese economy has delivered disappointing results. A sales tax increase on April 1 added to the country’s woes, and the stock market has stalled, yet again. While Japanese stocks may have a short-term rebound if the BoJ increases the size of its quantitative easing program as many expect, our outlook on Japan has been more bearish than many other managers. Some economists are even warning that a recession may be ahead.

Market Insights 5/18/2014

Volatile Trading

In the wake of some upbeat retail sector results and mixed economic reports, the U.S. equity markets shed early losses as stocks staged a late-day comeback that pushed the major indices out of the red and into the green. In economic news, U.S. housing starts and building permits came in well above expectations, led by a surge in construction activity for multi-family structures, while a preliminary consumer sentiment read was unexpectedly lower. Treasuries were lower.

On the earnings front, J.C. Penny reported a smaller-than-expected quarterly loss and Nordstrom topped the Street’s profit projections. In other news, Darden Restaurants agreed to sell its Red Lobster business to Golden Gate Capital for $2.1 billion and Dow member Pfizer announced that it will submit a New Drug Application with the U.S. FDA for its breast cancer treatment early 3Q of this year.

Lastly, gold was lower and crude oil prices were higher, while the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average added 45 points (0.3%) to 16,491

The S&P 500 Index moved 7 points (0.4%) higher to 1,878

The Nasdaq Composite increased 21 points (0.5%) to 4,091

In moderate volume, 710 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.52 to $102.02 per barrel, wholesale gasoline was $0.01 higher at $2.97 per gallon

The Bloomberg gold spot price lost $3.50 to $1,292.72 per ounce

Markets were mixed on the week, as the DJIA lost 0.6%, the S&P 500 Index was nearly unchanged, and the Nasdaq Composite Index increased 0.5%

Housing construction jumps, while consumer sentiment surprisingly drops

Housing starts for April came in well above expectations, rising 13.2% month-over-month to an annual pace of 1,072,000 units, compared to the 980,000 unit rate that economists surveyed by Bloomberg had called for. March’s starts were upwardly revised to an annual pace of 947,000, from the 946,000 rate initially reported. Plus, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, came in north of forecasts, increasing 8.0% m/m in April to an annual rate of 1,080,000, after March’s upward revision to a 1,000,000 rate—from a pace of 990,000 that was originally reported. Permits for April topped the annual pace of 1,010,000 units that economists had projected.

Today’s report suggests construction activity may be rebounding after being hampered by the winter weather. However, digging into the data, the largest share of the jump was led by a surge in multifamily structures, with starts being led by a near 43.0% rise in buildings for five units or more, while single family home starts rose 0.8%. Buildings for five units or more led the m/m growth in building permits, while single-family authorizations only ticked higher.

The preliminary University of Michigan Consumer Sentiment Index unexpectedly dropped to 81.8 this month from April’s nine-month high of 84.1, and compared to the increase to 84.5 that economists had anticipated. The softer-than-expected preliminary report came as both the economic conditions and the outlook components of the survey deteriorated. On inflation, the 1-year forecast remained at 3.2%, while the 5-year inflation outlook dipped to 2.8% from 2.9% in April.

Treasuries were lower, with the yield on the 2-year note gaining 1 basis point to 0.36%, while the yield on the 10-year note ticked 3 bps higher to 2.52% and the 30-year bond rate increased 2 bps to 3.35%.

Stocks step back from record highs

The Dow and S&P 500 pulled back from record highs as the week matured, courtesy of some mixed global economic data that fostered some growth uncertainty. Eurozone 1Q GDP growth came in below expectations, as stronger-than-expected output in Germany and an acceleration in Spain were met by flat growth from France, and an unexpected contraction in Italy. In the U.S., positive reports included a drop in jobless claims, inline consumer price inflation, improved small business optimism, and stronger-than-projected growth in regional manufacturing activity.

April retail sales came in softer than expected, industrial production unexpectedly declined, and homebuilder sentiment hit a twelve month low. The domestic earnings calendar was dominated by the retail sector, highlighted by Friday’s upbeat releases from J.C. Penney and Nordstrom, while Dow member Wal-Mart Stores Inc. posted a trifecta of disappointment by missing analysts’ profit and revenue projections and issuing softer-than-expected profit guidance. Outside the retail sector, the Street welcomed Dow component Cisco Systems Inc.’s better-than-expected quarterly results.

Small Caps & Growth Stocks Suffer Amid Decent Earnings: with first quarter earnings season largely in the books, the spread has widened out between the smaller cap/growth losers and larger cap/value winners. The shift toward value has been powerful and reflects the significant rotational correction that’s been underway for a couple of months. The move toward value can be seen as a possible positive sign for the economy. Often in history, a move toward value is a signal that the economy is set to turn higher. The rationale is that in a lower economic growth phase (like we were in recently), growth sells at a premium because it’s in short-supply. But as prospects for economic growth accelerate, investors turn their attention toward value and/or “growth-at-a-more-reasonable-price”. We feel valuations for the overall stock market still looks reasonable, and earnings growth is sufficient to keep the bull market alive although there will be bumps along the road.

Focus on Fed minutes with low bond yields on trader’s minds

Next week’s US economic calendar will bring more housing data, including existing home sales and new home sales, as well as the preliminary Markit US Manufacturing Index for May, the Index of Leading Economic Indicators, and the Kansas City Fed Manufacturing Activity Index. However, traders are likely to focus on the minutes from the last Federal Open Market Committee (FOMC) meeting given the strong gains in bonds and decline in yields this year, despite reduced asset purchases by the Fed.

In our opinion, the biggest surprise this year has been the slow economic growth seen around the world, most experts felt we would see GDP acceleration in Europe and I more developed pockets of the far east. Market sentiment has shifted from concerns about inflation to worries about disinflation or deflation. Despite most central banks holding short-term rates near zero to try to boost economic growth, long-term bond yields have been trending lower, narrowing the spread between short-term rates and long-term rates. The flattening of the yield curve and low-long term yields are likely to continue until growth picks up. As a result, bond investors may need to lower their expectations for long-term bond yields and consider new strategies for dealing with shifting markets as it appears will be depressed for most of 2014.

Europe mostly higher, Asia mixed

The European equity markets finished mostly higher, rebounding from yesterday’s solid declines that came from a disappointing read on Eurozone 1Q GDP growth, exacerbated by earnings and economic reports in the U.S. Meanwhile, today’s economic calendar showed the Eurozone trade surplus came in wider than projected for March, while France’s 1Q nonfarm payrolls dipped inline with expectations and growth in European new car registrations slowed last month.

Stocks in Asia finished mixed. The Japanese yen maintained its recent gains, boosted by some disappointing economic data in the U.S. and Europe yesterday, which fueled a sell-off in the global equity markets. However, Indian equities advanced to another record high in a volatile session, in the wake of results from the country’s national election, which showed pro-business party leader Modi will become the nation’s new prime minister. Elsewhere, a report from China showed that the nation’s foreign direct investment rose more than expected in April, while after the closing bell, Hong Kong announced 1Q GDP rose 0.2% quarter-over-quarter, after expanding by 0.9% in the previous quarter, and compared to the 0.4% growth that was projected.

Market Insights 5/15/2014

Equities Sink

The U.S. equity markets were under heavy pressure throughout the trading session, as stocks continued to pull back from record-highs posted earlier in the week in the wake of some disappointing earnings reports and mixed economic data.

Weekly initial jobless claims and regional manufacturing activity were better than the Street had expected and consumer prices rose mostly inline with estimates, while homebuilder sentiment and industrial production reports fell south of analysts’ expectations.

Treasuries were nicely higher following the domestic reads and the decline in equities. Gold and crude oil prices were lower, while the U.S. dollar was flat.

The Dow Jones Industrial Average tumbled 167 points (1.0%) to 16,447

The S&P 500 Index lost 18 points (0.9%) to 1,871

The Nasdaq Composite declined 31 points (0.8%) to 4,069

In moderate volume, 750 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.87 to $101.50 per barrel, wholesale gasoline lost $0.01 to $2.96 per gallon

The Bloomberg gold spot price was $9.60 lower at $1,296.36 per ounce

Jobless claims drop and regional manufacturing data tops forecasts

Weekly initial jobless claims fell by 24,000 to 297,000 last week, below the 320,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 2,000 to 321,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 2,000 to 323,250, while continuing claims decreased by 9,000 to 2,667,000, south of the forecasted level of 2,690,000.

The Consumer Price Index (CPI) showed prices at the consumer level were up 0.3% month-over-month in April, matching the forecasted increase, while March’s 0.2% increase was unrevised. The core rate, which strips out food and energy, rose 0.2% m/m in April, compared to the 0.1% gain that was projected, and March’s 0.2% rise was unadjusted. On a y/y basis, consumer prices were 2.0% higher, inline with forecasts, and the core CPI was up 1.8%, above expectations of a 1.7% increase.

Industrial production unexpectedly fell, declining 0.6% m/m in April, compared to the flat reading expected, while March’s 0.7% gain was revised higher to a 0.9% rise. Utilities output fell sharply and manufacturing production declined, more than offsetting a solid gain in mining output. Moreover, capacity utilization declined to 78.6%, from March’s upwardly revised 79.3%, and compared to the 79.1% forecasted. Utilization is 1.5 percentage points below its long-run average.

The Empire Manufacturing Index, a measure of manufacturing in the New York region, showed growth in output jumped in May to the highest level since June 2010, rising to 19.0 from the unrevised 1.3 in April. The estimate of economists called for an acceleration to 6.0. In other regional manufacturing news, the Philly Fed Manufacturing Index showed growth in activity for the mid-Atlantic region decelerated by a smaller amount than expected in May, declining to 15.4 from 16.6 in April and compared to the decrease to 14.0 that was forecasted. Readings above zero denote expansion.

The National Association of Home Builders (NAHB) Housing Market Index, a gauge of homebuilder sentiment, surprised to the downside, dipping to 45 for May—the lowest in a year—from April’s downwardly revised 46, and compared to the 49 level that economists had expected. The index remained at a level showing more homebuilders consider the housing market poor than good, denoted by a reading below 50, for the fourth-straight month. The NAHB said it is clear that builder sentiment is becoming more inline with the market reality of a continuing but modest recovery, but builders expressed some optimism that sales will pick up in the coming months.

Treasuries were higher following the data, with the yield on the 2-year note dipping 1 basis point to 0.36%, the yield on the10-year note dropping 4 bps to 2.50% and the 30-year bond rate falling 5 bps to 3.33%.

Europe mostly lower, Asia mixed

The European equity markets finished mostly to the downside following the U.S. economic data and as traders digested a plethora of GDP reports in the Eurozone, while grappling with the implications for the European Central Bank’s (ECB) monetary policy. The preliminary reading of Eurozone 1Q GDP showed growth of 0.2% quarter-over-quarter, matching 4Q’s pace but below the 0.4% expansion that was anticipated. Stronger-than-expected growth out of Germany and an acceleration in Spain were more than offset by flat output from France, and an unexpected contraction in Italy. The sluggish eurozone growth, coupled with low inflation levels, is ratcheting up the pressure on the ECB to act to stimulate the economy.

Stocks in Asia finished mixed. In Japan, yesterday’s solid gain for the yen and disappointing earnings reports overshadowed a stronger-than-expected read on the nation’s 1Q economic output, while the country’s 1Q GDP expanded at an annualized q/q rate of 5.9%, from the downwardly revised 0.3% growth in the previous quarter, and compared to the 4.2% increase in output that was anticipated. A sales tax increase on April 1 added to the country’s woes, and the stock market has stalled. While Japanese stocks may have a short-term rebound if the Bank of Japan (BoJ) increases the size of its quantitative easing (QE) program as expected, our outlook on Japan is dimming. Some economists are even warning that a recession may be ahead.